## wpiea2025114-print-pdf ## Source details **Canonical URL:** [wpiea2025114-print-pdf](https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025114-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/wp/2025/english/wpiea2025114-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/wp/2025/english/wpiea2025114-print-pdf.pdf.json) --- ### Role and evolution of the MFF - The Multiannual Financial Framework (MFF) is the EU budget instrument that has supported European economic convergence through cohesion policy and bolstered resilience during recent crises through NextGenerationEU (NGEU). - Since deployment in 1988, the MFF evolved to address boosting economic efficiency, facilitating redistribution, and dealing with pressing challenges. - Europe faces a complex global environment and profound structural and demographic shifts that call for decisive EU-level actions alongside single market strengthening and national structural reforms. ### Recommended revamp of the next MFF (2028-34): three lines of reform - First: Prioritize European public goods (EPGs) - Focus MFF on common priority areas best addressed at EU level to internalize cross-border externalities, leverage economies of scale, and avoid costly duplication. - Target critical EPG investments: resilience (energy security, clean energy transition, defense) and productivity (research and innovation). - Joint provision at EU level would yield cost-effectiveness and savings for member states’ national budgets, supporting fiscal sustainability. - Based on estimated public investment needs, EU budget allocation for EPGs would need to increase to at least twice the current level. - Achieving this requires increasing the overall budget by at least 50 percent (about 0.6 percent of GNI annually) if funding for CAP and Cohesion Policy were to be kept unchanged. - Second: Revise MFF design to maximize impact - Increase flexibility to respond to macroeconomic shocks and changing priorities. - Reduce administrative burdens and streamline processes to improve efficiency. - Incentivize good performance and crowd in additional national/regional and private resources. - An expanded envelope for EPG investment would support structural reforms to deepen the single market, facilitate allocative efficiency gains, and boost resilience. - Third: Strengthen financing with greater own resources and borrowing capacity - Current financing relies mostly on GNI-based national contributions with no regular borrowing capacity outside crises; this constrains EU-level financing potential. - Integrate borrowing as a regular financing tool, paired with own resources to secure repayments, to allow strategic investments and distribute fiscal burden over time. - Calculations suggest increasing own resources by about 0.2 percent of GNI annually to cover peak debt servicing costs and buffers, though significant uncertainties remain. - Bond-financed EU budget can strengthen EU bonds in financial markets, helping advance European safe assets and the capital markets union. ### Complementary reforms and implementation considerations - Unlocking EPG benefits requires complementary EU-level reforms that deepen the single market and national-level reforms tailored to country-specific structural gaps. - References to Budina and others (2025) and IMF 2024c for detailed complementary reforms. ### Overview and motivation (Introduction) - Analyses indicate the need for decisive EU-level actions to boost productivity and enhance resilience amid structural and demographic changes. - The MFF translates high-level strategies into financial allocations that foster cross-border collaboration, incentivize national reforms, and address regional disparities. ### Current MFF role and key figures - Current MFF: €1.2 trillion (2020 prices) for 2021-2027 — a little over 1 percent of EU GNI annually. - CAP and Cohesion Policy (CP) account for almost two-thirds of the current MFF (excluding NGEU). - NGEU total program envelope: €826 billion (Commission’s maximum borrowing capacity €807 billion). - NGEU allocation: €743 billion to the Recovery and Resilience Facility (RRF), consisting of €359 billion in grants and €384 billion in loans. - Untapped NGEU borrowing capacity as of 2023 deadline: about €93 billion of the loan portion. - Outstanding EU supranational bonds surpassed €1.0 trillion (in March 2024). - SEAR cap: €1.2 billion annually (2018 prices). - Recent estimates of annual NGEU debt servicing costs: peak in 2028 at approximately € 20-38 billion. - Projected NGEU debt servicing over 2028-2034: between €140 billion and €185 billion. ### Three key departures needed for 2028-34 MFF - Spending priorities - CAP and CP absorb nearly two-thirds of spending, restricting new investments. - To meet increased EPG investment needs without reducing CAP and CP, MFF would need to increase from 1.1 percent of GNI to 1.7 percent of GNI in 2028-34 (about a 50 percent increase). - Expanded envelope would allow doubling of EPG investments. - Evidence of potential savings from EU-level action: - Clean energy transition: coordination can reduce investment costs by 7 percent (IMF 2024c). - Security and defense joint procurement: savings potential up to 30 percent (McKinsey 2016). - Design features - Consolidate and cluster programs to remove overlapping objectives. - Enhance flexibility tools to better handle shocks. - Extend performance-based budgeting to spur national reforms complementary to EU investments. - Deploy financial instruments with safeguards (e.g., strategic guarantees) to catalyze private investment. - Financing and resources - Expanded envelope better supported by permanent bond financing paired with own resources for debt service. - Additional own resources of about 0.2 percent of GNI annually could cover peak debt servicing costs and provide buffers, with uncertainties. - Durable EU borrowing would enhance market liquidity, investor confidence, and EU securities as stable benchmark safe assets. - Rolling over NGEU obligations could open space for EPG investments (would require member states’ agreement). ### European Public Goods (EPGs): priorities and rationale - Definition: goods and services with favorable cross-border spillovers and positive externalities warranting at least partial EU-level provision per subsidiarity. - Rationale: EU-level provision internalizes externalities, leverages economies of scale, and avoids duplicative efforts, potentially yielding net savings and creating fiscal space. - Key EPG priority areas aligned with EU strategic agenda 2024-2029: - Digital, research & innovation (R&I) - EU budget allocations: €2 billion for digital infrastructure; €100 billion (€89 billion excluding the NGEU) for financial support for R&I—11 percent of overall budget envelope or 7.5 percent excluding NGEU. - Horizon Europe: €71.4 billion under the MFF and additional €5 billion under the NGEU. - InvestEU: €10 billion allocated for provisioning the guarantees of €26.2 billion. - Commission (2020) lower-side estimate: €125 billion per year (in 2020 prices) additional investments needed for digital transformation. - Saulnier and others (2025) estimate €108 to €278 billion annually in public investment. - Recent policy reports (Draghi 2024) suggest doubling €100 billion budget to about €200 billion next MFF. - EU security and defense - Current MFF allocates about €11 billion (0.9 percent of MFF total resources) for R&D and industry support. - Supplemented by off-budget instrument: €17 billion in the European Peace Facility. - Commission estimates additional investment of €500 billion over next 10 years for defense goals. - Other analyses suggest increases such as €250 billion annually compared to baseline over five years (Burilkov and Wolff 2025). - Defense Commissioner ambition for next MFF 2028-2034: about €100 billion. - Clean energy transition and energy security - Dedicated instruments modest: about €20 billion, or 1.7 percent of the budget (Just Transition Fund, LIFE, Connecting Europe Facility – Energy). - Climate mainstreaming: 30 percent of programs’ budgets tracked; Commission estimates climate-related spending for 2021–2027 at €658 billion including NGEU (€276 billion), amounting to 34.3 percent of overall envelope. - Commission estimates annual additional investment of around €480 billion needed in 2021-2030 for energy supply, demand, and transport. - IMF estimate: needs could have been reduced by around €200 billion cumulatively over 2024-2030 through a proposed Climate and Energy Security Facility if implemented in 2024 (IMF 2024c). - Expected growth to €600-700 billion annually over 2031-2040—about 2 percent of GDP. - Public share estimated at 25–50 percent. - ECB (Nerlich and others 2024) approximates EU public funding share at around 17 percent, amounting to over €760 billion for 2028-2034. - IPCEIs - Currently financed via state aids outside EU budget; project-by-project EU co-financing suggested where positive spillovers justify it. ### Emergencies and natural disaster relief - Standing reserve: Solidarity and Emergency Aid Reserve (SEAR) capped at €1.2 billion annually (2018 prices), financed from MFF headroom. - Extraordinary emergencies can be financed by borrowing instruments outside the MFF (e.g., SURE and NGEU) if rapid frameworks exist. - NGEU relied on temporary increase in own resources ceiling and headroom ring-fenced for post-pandemic recovery until NGEU borrowing repaid by 2058. - Given rising frequency and cost of emergencies, reassess reserve size and enhance operational efficiency (streamlining applications, reducing delays). - Paper focuses budget size discussion on regular MFF allocations for EPG investments; emergency instruments remain appropriate outside MFF ceilings. ### Box 1 — Current MFF allocation and future needs (selected figures) - Research & innovation - €2 billion for digital infrastructure. - €100 billion (€89 billion excluding the NGEU) for financial support for R&I—11 percent of overall budget envelope or 7.5 percent excluding NGEU. - Horizon Europe: €71.4 billion under MFF and €5 billion under NGEU. - InvestEU: €10 billion for provisioning guarantees of €26.2 billion. - Commission (2020) lower-side estimate: €125 billion per year (2020 prices) additional investments for digital transformation. - Saulnier and others (2025): €108 to €278 billion annually in public investment. - Draghi (2024) suggests doubling current €100 billion to about €200 billion next MFF. - Security and defense - Current MFF allocates about €11 billion (0.9 percent of MFF total resources). - Off-budget: €17 billion in European Peace Facility. - Commission additional investment estimate: €500 billion over next 10 years. - Burilkov and Wolff (2025) suggest increases such as €250 billion annually compared to baseline over five years. - Defense Commissioner ambition for next MFF: about €100 billion. - Clean energy transition - Dedicated instruments total about €20 billion (1.7 percent of budget). - For 2021–2027, Commission estimates climate-related spending €658 billion including NGEU (€276 billion) — 34.3 percent of overall envelope. - Commission estimates annual additional investment of around €480 billion needed in 2021-2030. - IMF estimate of potential €200 billion cumulative reduction over 2024-2030 if a Climate and Energy Security Facility implemented in 2024. - Expected needs to grow to €600-700 billion annually over 2031-2040 (~2 percent of GDP). - Public share estimated at 25–50 percent; ECB estimate of EU public funding share around 17 percent, amounting to over €760 billion for 2028-2034. - Supporting estimates - Saulnier and others (2025) estimate investment needs €652-927 billion per year for EU competitiveness, including €108-278 billion per year in public investment up to 2035. - Efficiency gains from strong collaboration: 0.9 percent to 2.6 percent of GDP in 2035 (the “cost of non-Europe”). - Size of dedicated instruments: Just Transition Fund (€8.4 billion), LIFE (€4.3 billion), Connecting Europe Facilities for energy and transport (€5.8 billion and €2.1 billion respectively). ### Augmenting the size of the MFF — shortfall and expansion needs - Current MFF allocations for R&I, digital transformation, clean energy transition and security/defense are "modest" and together add up to less than 40 percent of the budget, or about 0.4 percent of EU GNI. - Current MFF investments in clean energy transition: about €658 billion for 2021-27 including NGEU and less than €400 billion excluding NGEU; estimated investment needs for 2028-34 are over €760 billion. - NGEU provided a temporary envelope of 0.7 percent of GNI, nearly doubling resources for clean energy transition and energy security; NGEU expires in 2026 (about 50 percent of funds not disbursed as of May 2025), risking underpreparedness post-2026. - Literature estimates: public sector annual investment needs amount to 0.5-1 percent of GDP (Pisani-Ferry and Tagliapietra, 2024); public share estimates around 25 percent (EIB 2021; Darvas and Wolff 2022) or around 50 percent for France (Pisani-Ferry and Mahfouz, 2023). - To prevent critical shortfall, the EU budget would need to more than double its current MFF allocation for EPG priorities; this requires expanding the overall MFF size by at least 50 percent, assuming funding for CP and CAP remain unchanged. - Specific allocation benchmarks: - Digital, R&I: proposals aim to double allocation to €200 billion. - Defense: ambition to allocate €100 billion (less than 30 percent of total investment needs estimated by Commission). - Clean energy transition & energy security: EU budget investment needs calculated to be over €750 billion for next MFF. ### Current MFF design: complexity, rigidity, and limitations - MFF sets seven-year expenditure ceilings with limited reallocation margins; revisions often require unanimous member state agreement. - Budget fragmentation: over 50 programs, overlapping objectives, multiplicity of sub-headings increases administrative burdens and hampers transparency and access. - Example overlap: digital transition funding across Horizon Europe, Digital Europe Programme, Connecting Europe Facility – Digital, and ESI Funds. - Flexibility tools: unallocated annual “margins” total €5.5 billion (0.5 percent of overall expenditure); “special instruments” total €24 billion (1.9 percent of total expenditure). Combined flexible tools represent 2.4 percent of total expenditure (excluding temporary instruments like NGEU and SURE). ### Streamlining and strategic central capacity - Consolidation and clustering around key priorities could reduce fragmentation and improve alignment with MFF ambitions. - Recommendation: balance traditional “enabler” role with enhanced centralized capacity to identify and steer EU-wide strategic investments (increase allocations to Horizon Europe, Connecting Europe Facility, InvestEU, Defense Fund, Competitiveness Coordination Tool). - Harmonize eligibility, application, reporting, and co-financing rates to alleviate administrative burdens, especially for SMEs. ### Making the budget more adaptable - Preserve predictability while enhancing responsiveness: enhance flexibility tools and expand special instruments/margins to respond to moderately sized shocks. - Consolidating budget headings can modestly increase flexibility; if headings remain many, special instruments should be increased. - Recommend expenditure review as part of regular budget cycle to guide mid-term adjustments (reference: mid-term revision in 2023-24 added €64.6 billion, primarily for the Ukraine Facility). ### Strengthening performance-based budgeting - RRF links disbursements to targets and milestones; RRF contributed to increase in share of CSRs with some progress from 52 percent in 2021 to 69 percent in 2023. - Growth impact of RRF: expected to boost euro area GDP level by 0.4-0.9 percent by 2026; sustained productivity gains drive GDP-level gains to 0.8-1.2 percent by 2031 (Bańkowski and others 2024). - Use direct performance-based approaches where outcomes closely linked to efforts (notably many CP and CAP funds) to incentivize accompanying national reforms. - Cost-based budgeting appropriate for competitive, high-risk, cross-border, or indispensable EU-level programs (Horizon Europe, Innovation Fund, Connecting Europe Facility, humanitarian aid, public health, security and defense). - Performance indicators should balance input/output/outcome/impact; prefer outcome indicators where feasible. - Minimize administrative burdens via harmonized reporting, technical assistance, and capacity building—RRF absorption slowed partly by heavy administrative burdens; by end-2024 less than seven percent of available Cohesion Policy funds had been paid out. ### Enhancing deployment of financial instruments - Shift from grants to financial instruments (loans, guarantees, equity) since EFSI and under InvestEU (€22.5 billion in guarantees from EU budget; InvestEU aims to mobilize €372 billion). - Financial instruments should target projects with profitable returns where private finance can be leveraged and additionality is clear. - Standardize and consolidate EIB cooperation mandates with the MFF to unlock tied-up funds and reduce reporting burdens (current fragmentation: over 130 mandates and over 400 reports annually for EIB). - Safeguards: strengthen risk monitoring and mitigation for guarantees, regular evaluations, streamlined governance/reporting, and enhanced technical assistance. - EFSI reported mobilizing €503 billion additional, but European Court of Auditors (2025) found this overstated by €131 billion. ### Financing the next MFF: options and role of EU borrowing - Current financing sources (excluding temporary NGEU borrowing until 2026): - GNI-based national contributions: around 0.7 percent of GNI averaged over 2021-23. - VAT-based own resources: 0.3 percent of each country’s VAT intake, amounting to 0.1 percent of GNI. - Customs duties: about 0.1 percent of EU GNI, roughly 15 percent of total budget. - Plastic waste contributions: small share. - Three broad financing options: - Increase GNI-based national contributions (immediate national burden). - Introduce new own resources (greater EU discretion; politically difficult). - Debt-financing (bond financing) backed by increased budget headroom—assessed as most viable despite institutional and legal challenges. - NGEU was unprecedented planned issuance of €712 billion and remains temporary/exceptional; ad-hoc borrowing creates political uncertainty and hinders development of EU bonds as liquid common safe assets. - Expanding EU borrowing in normal times could: - Finance EPG investments with better intertemporal cost-return alignment. - Develop a liquid market for common European safe assets, strengthen euro’s international role, and capture a convenience yield. - Require improved consolidated fiscal reporting and monitoring of contingent liabilities; consolidated EU accounts available for 2021-2023 as of June 2025. - EU debt after consolidating on-lent assets against member states was €169 billion until 2023 (compared to €740 billion pre-consolidation), a fraction of €14 trillion general government debt of EU member states. ### New own resources and fiscal safeguards - Treaty requires increased borrowing be paired with increased claims to cover debt servicing (e.g., GNI-based member states’ guarantees as in NGEU). - Commission 2023 proposal for new own resources expected to generate about 0.2 percent of GNI annually (or €36.5 billion in 2018 prices), sufficient to cover peak servicing costs of NGEU grant estimated around 0.1-0.12 percent of GNI. - Using NGEU benchmark: proposed 50 percent budget increase is approximately 1.8 times size of NGEU’s grant portion. Phasing in new own resources around 0.2 percent of GNI annually (0.12 percent multiplied by 1.8), with additional buffers, would likely cover full bond-financing of budget expansion. - Potential own resources: revenues from ETS, CBAM, possible BEFIT contribution, or temporary statistical-based own resource on company profits if BEFIT not agreed. - Own resources tied to EU policy benefits could improve fairness by aligning contributions with beneficiaries (e.g., capacity charges for cross-border infrastructure usage). - Political feasibility depends on demonstrating positive-sum benefits to member states; maximizing EPG delivery can shift debate away from zero-sum net contribution framing. ### Conclusion — overall assessment, priorities, and constraints - The MFF requires overhaul to enable EU-level actions that boost productivity and resilience. - Three priority reform areas: - Spending priorities: emphasize EPGs—R&I, energy security/clean transition, defense; MFF size needs to rise to at least 1.7 percent of EU GNI from current 1.1 percent if CAP and CP remain unchanged. - Design features: increase flexibility, reduce administrative burdens, incentivize performance, and crowd in additional resources. - Financing: reconfigure financing with bond-financing and identified own resources for debt service to support larger envelope, enhance macro stabilization, and create EU safe asset yield curve. - Implementation challenges: - Treaty limits and requirement to ensure appropriate amounts for cohesion and agricultural policies. - Unanimous approval from all member states required, posing legal and political difficulties. - Despite challenges, an overhaul may be unavoidable to meet large upcoming challenges and sustain social and economic outcomes. *International Monetary Fund — Making the EU’s Multiannual Financial Framework Fit for Purpose (Executive Summary and selected sections from Working Paper No. WP/2025/114).* ### Executive Summary ...................................................................................................... ### Executive Summary ### Role and evolution of the MFF - The EU budget, known as the Multiannual Financial Framework (MFF), has been instrumental for helping the EU navigate common challenges—supporting European economic convergence through its cohesion policy and bolstering resilience during recent crises through the NextGenerationEU (NGEU). - Since the first MFF was deployed in 1988, it has evolved into a key tool for addressing important goals of boosting economic efficiency, facilitating redistribution, and dealing with pressing challenges. - Europe faces an increasingly complex global environment and profound structural and demographic shifts, calling for decisive actions at the EU level alongside actions to strengthen the EU single market and structural reforms at the national level. ### Recommended revamp of the next MFF (2028-34): three lines of reform - First: Prioritize European public goods (EPGs) - The MFF should emphasize key common priority areas optimally addressed at the central, EU level to better internalize positive cross-border externalities, leverage economies of scale, and avoid costly duplication at the national level—delivering European public goods, or EPGs. - Specifically target critical EPG investments where joint action is clearly needed: investments to enhance resilience (for instance, investing in energy security, clean energy transition, and defense) and to boost productivity (e.g., spending on research and innovation). - Joint provision at the EU level would help achieve common goals more cost effectively, yielding savings for member states’ national budgets and supporting fiscal sustainability. - Based on estimated public investment needs in these areas, the EU budget allocation for EPGs would need to increase to at least twice the current level. - Achieving this would require increasing the overall budget by at least 50 percent (about 0.6 percent of GNI annually), if funding for other programs including the Common Agricultural Policy and the Cohesion Policy were to be kept unchanged. - Second: Revise MFF design to maximize impact - Make the MFF more flexible in responding to macroeconomic shocks and changing priorities. - Make the MFF more efficient by reducing administrative burdens and streamlining processes. - Make the MFF more effective by incentivizing good performance and crowding in additional resources from national and regional governments, as well as the private sector. - Such an expanded envelope for EPG investment would support and reinforce needed structural reforms at the EU and national levels to deepen the integration of the single market, facilitate allocative efficiency gains, and boost resilience. - Third: Strengthen financing with greater own resources and borrowing capacity - The current framework, based mostly on GNI-based national contributions and with no borrowing capacity outside of crises, constrains the potential of EU-level financing. - Integrating borrowing as a regular financing tool, with own resources to secure repayments, can allow for greater strategic investments without delay while distributing the fiscal burden more effectively over time. - Calculations based on available estimates of EU debt servicing costs suggest that increasing own resources by about 0.2 percent of GNI annually to cover peak debt servicing costs along with additional buffers for unexpected challenges would likely provide financial security to support the proposed budget increase, though significant uncertainties remain. - As a beneficial side effect, a bond-financed EU budget can lead to a stronger presence of EU bonds in financial markets which can be a step for Europe to further reap the benefit of European safe assets and advance the capital markets union. ### Complementary reforms and implementation considerations - Fully unlocking the benefits of EPG investments will require complementary EU-level reforms that deepen the single market, removing barriers to firms’ scale up and innovation, and national-level reforms tailored to country-specific structural gaps that hold back growth potential. - Budina and others (2025) and IMF 2024c delve into the needed EU- and national-level complementary reforms. *International Monetary Fund — Making the EU’s Multiannual Financial Framework Fit for Purpose (Executive Summary)* ### Introduction ### wpiea2025114-print-pdf - Introduction ### Overview and motivation - Recent analyses converge on the need for decisive EU-level actions to boost productivity and enhance resilience in the face of structural and demographic changes. - The Multiannual Financial Framework (MFF) is described as a critical policy lever for enabling EU-level actions by translating high-level strategies into financial allocations that foster cross-border collaboration, incentivize national reforms, and address regional disparities. ### Current MFF role and performance - The MFF conducts EU-level fiscal policy and directs resources toward cohesion and other priorities that have historically contributed to convergence after the 2004 enlargement. - NextGenerationEU (NGEU) has mobilized significant resources for recovery, resilience, and crisis responses. - Key current figures: - Current MFF: €1.2 trillion (2020 prices) for 2021-2027 — a little over 1 percent of EU GNI annually. - CAP and Cohesion Policy (CP) account for almost two-thirds of the current MFF (excluding NGEU). - NGEU total program envelope: €826 billion (Commission’s maximum borrowing capacity €807 billion). - NGEU allocation: €743 billion to the Recovery and Resilience Facility (RRF), consisting of €359 billion in grants and €384 billion in loans. - Untapped NGEU borrowing capacity as of 2023 deadline: about €93 billion of the loan portion. - Outstanding EU supranational bonds surpassed €1.0 trillion (in March 2024). - SEAR cap: €1.2 billion annually (2018 prices). - Recent estimates of annual NGEU debt servicing costs: peak in 2028 at approximately € 20-38 billion. - Projected NGEU debt servicing over 2028-2034: between €140 billion and €185 billion. ### Three key departures the paper argues are needed for the 2028-34 MFF - Spending priorities - The MFF has not kept pace with a growing list of centralized challenges; CAP and CP absorb nearly two-thirds of spending, limiting allocations for new investments. - To meet increased investment needs in European public goods (EPGs) without reducing CAP and CP, the MFF would need to increase by about 50 percent from 1.1 percent of GNI to 1.7 percent of GNI in 2028-34. - The expanded envelope would allow a doubling of EPG investments to meet fast-crystallizing spending requirements. - Evidence of potential savings from EU-level action: - Clean energy transition: better coordination and planning can reduce investment costs by 7 percent (IMF 2024c). - Security and defense joint procurement: savings potential of up to 30 percent (McKinsey 2016). - Design features - Scope for streamlining through consolidation and clustering of programs around key priorities to remove overlapping objectives. - Reinforce flexibility tools to better handle shocks in an increasingly shock-prone world. - Extend performance-based budgeting into broader areas where financial incentives can spur national reforms complementary to EU investments. - Enhance deployment of financial instruments with safeguards (e.g., strategic guarantees) to enable financial intermediaries to take on ambitious projects and catalyze private investment. - Financing and resources - An expanded budget envelope would be better supported by more permanent bond financing paired with own resources for debt service. - Calculations suggest additional own resources of about 0.2 percent of GNI annually could cover peak debt servicing costs and provide buffers for unexpected challenges, though significant uncertainties remain. - A more durable presence of EU borrowing would enhance market liquidity, investor confidence, and the role of EU securities as stable benchmark safe assets. - Expanding EU borrowing in normal times could improve financing of EPGs and macroeconomic stabilization via better risk sharing. - Rolling over NGEU obligations would open up space for EPG investments (would require member states’ agreement). ### European Public Goods (EPGs): priorities and rationale - Definition and justification - EPGs: goods and services with favorable cross-border spillovers and positive externalities not fully captured at the national level; warrant at least partial EU-level provision per subsidiarity. - EU-level provision can internalize externalities, leverage economies of scale, and avoid duplicative national efforts, potentially yielding net savings and creating fiscal space. - Key EPG priority areas aligned with the EU strategic agenda 2024-2029 - Digital, research & innovation (R&I) - Current EU-level public spending on R&I and digital transition lacks scale and focus. - Policies recommended include regulatory simplification, deepening the single market, improved policy coordination, and finance for high-risk, high-reward projects. - EU security and defense - Stronger EU involvement/coordination can improve cost-effectiveness through economies of scale and reduced redundancies. - Budget can fund coordination and governance of joint procurement, finance R&D, and targeted investments in cross-border infrastructure to improve productivity. - Note: the EU budget cannot finance expenditures for military or defense operations (Article 41(2) TEU) but can finance related R&D and industrial-policy activities. - Clean energy transition and energy security - Achieving net-zero by 2050 requires major renewables deployment, improved efficiency, and electrification. - EU roles: regulate ETS and CBAM (potential revenue sources), invest in R&D and cross-border electricity infrastructure, and support vulnerable communities. - Possible co-financing of IPCEIs (Important Projects of Common European Interest) - IPCEIs currently financed via state aids outside the EU budget; the paper suggests project-by-project exploration of EU co-financing where positive spillovers justify it. ### Emergencies and natural disaster relief - Emergency financing modalities should balance tapping standing reserves and deploying special instruments outside the MFF. - Standing reserve: Solidarity and Emergency Aid Reserve (SEAR), capped at €1.2 billion annually (2018 prices), financed from the MFF headroom. - Extraordinary emergencies can be financed by borrowing instruments outside the MFF (e.g., SURE and NGEU), provided rapid implementation frameworks exist. - NGEU financing relied on a temporary increase in the own resources ceiling and headroom ring-fenced for post-pandemic recovery until NGEU borrowing is repaid by 2058. - Given rising frequency and cost of emergencies, reassessing reserve size and enhancing operational efficiency (streamlining applications, reducing delays) may be necessary. - The paper focuses its budget size discussion on regular MFF allocations for EPG investments, while emergency instruments remain appropriate to operate outside MFF ceilings. ### Paper structure and analytical approach - The paper: 1. Proposes areas for MFF investment in EPGs and estimates the augmentation needed to deliver these investments if CP and CAP funding remain unchanged. 2. Proposes MFF design changes to improve efficiency and effectiveness (streamlining, adaptability, performance-based budgeting, financial instruments). 3. Discusses enhancing the EU budget’s financial capacity and proposes a more permanent presence of EU common borrowing in the MFF paired with own resources for debt service. *Source: wpiea2025114-print-pdf - Introduction (IMF Working Paper).* ### Box 1. European Public Goods Investment: Current MFF Allocation and Future Needs ### Box 1. European Public Goods Investment: Current MFF Allocation and Future Needs ### Research and innovation - EU budget allocations: - €2 billion for digital infrastructure. - €100 billion (€89 billion excluding the NGEU) for financial support for R&I—amounting to 11 percent of the overall budget envelope or 7.5 percent excluding the NGEU. - Horizon Europe: €71.4 billion under the MFF and additional €5 billion under the NGEU. - InvestEU: €10 billion allocated for provisioning the guarantees of €26.2 billion, in partnership with the European Investment Bank (EIB) and other financial intermediaries. - Estimates of investment needs and public share: - Commission (2020) lower-side estimate: total additional investments needed for digital transformation amount to €125 billion per year (in 2020 prices). - Saulnier and others (2025) estimate a range of €108 to €278 billion annually in public investment. - Recent policy reports (Draghi 2024) suggest doubling the current €100 billion budget to about €200 billion in the next MFF. ### Security and defense - Current allocations and off-budget instruments: - Current MFF allocates about €11 billion (0.9 percent of the MFF total resources), primarily directed toward R&D and industry support. - Supplemented by an off-budget instrument (e.g., €17 billion in the European Peace Facility). - Estimated additional needs and ambitions: - Commission estimates additional investment of €500 billion over the next 10 years to meet the EU’s defense goals. - Other analyses (Burilkov and Wolff 2025) suggest, for instance, an increase of €250 billion (annually compared to the baseline) over the next five years for effective defense against Russia. - For the next MFF 2028-2034, the EU Defense and Space Commissioner has indicated an ambition to increase the defense allocation to about €100 billion. ### Clean energy transition - Current dedicated instruments and climate mainstreaming: - Dedicated instruments modest: about €20 billion, or 1.7 percent of the budget, in Just Transit Fund, LIFE program, and Connecting Europe Facility – Energy. - Climate mainstreaming mandates programs across all policy areas allocate 30 percent of their budgets to climate objectives and track expenditures through green budget tagging. - For 2021–2027, the Commission estimates climate-related spending will total €658 billion, including those financed through NGEU (€276 billion) which expires in 2026—amounting to 34.3 percent of the overall budget envelope. - Challenges in tagging may lead to an overestimate of these figures (Darvas and Sekut, 2025; Begg and others, 2025; European Court of Auditor, 2024). - Estimated additional investment needs: - Commission estimates an annual additional investment of around €480 billion will be needed in 2021-2030 for energy supply (including power grid), energy demand, and transport. - IMF estimate: these needs could have been reduced by around €200 billion cumulatively over the period 2024-2030 through the IMF’s proposed Climate and Energy Security Facility if implemented in 2024 (IMF 2024c). - Expected to grow to €600-700 billion annually over 2031-2040—amounting to about 2 percent of GDP. - Public vs private shares: - Public share estimated at 25–50 percent. - ECB (Nerlich and others 2024) approximates the EU public funding share at around 17 percent, based on the sectoral public investment share, weighted by the sector’s total investment needs estimated by the Commission. This amounts to over €760 billion for the 2028-2034 period. ### Notes and supporting estimates extracted from the source - Saulnier and others (2025) estimate that for the EU to retain its position as a global contender, its investment needs are €652-927 billion per year, including €108-278 billion per year in public investment up to 2035, based on reviews of recent literature. They estimated that strong collaboration among member states, coordinated through the EU, can yield efficiency gains for public and private sectors between 0.9 percent and 2.6 percent of GDP in 2035, which they dubbed as “the cost of non-Europe.” - The Commission indicated that the €500 billion estimate is based on the Strategic Compass to the European Defense Industrial Strategy, as well as some member states’ call for European air defense shield, reinforcement of the Union’s eastern land border. - The size of dedicated instruments is small: Just Transit Fund (€8.4 billion) and Program for Environment and Climate Action (LIFE, €4.3 billion), as well as Connecting Europe Facilities for energy and transport for infrastructure investments (€5.8 and *Source: Box 1. European Public Goods Investment: Current MFF Allocation and Future Needs (wpiea2025114-print-pdf).* ### 2.1 billion respectively). ### Augmenting the Size of the MFF ### Shortfall versus investment needs - Current MFF allocations for key priority areas (R&I and the digital transformation, the clean energy transition and energy security, EU security and defense) are described as "modest" and together add up to less than 40 percent of the budget, or about 0.4 percent of EU GNI. - Current MFF investments in clean energy transition are about €658 billion for 2021-27 including the amount from NGEU and less than €400 billion excluding the amount from NGEU, while estimated investment needs for 2028-34 are over €760 billion (see Box 1 referenced in source). - The NGEU provided a temporary envelope of 0.7 percent of GNI, nearly doubling resources allocated for advancing the clean energy transition and energy security, but NGEU expires in 2026 (about 50 percent of funds not disbursed as of May 2025), risking an underprepared EU budget post-2026. - Literature estimates cited: public sector annual investment needs amount to 0.5-1 percent of GDP (Pisani-Ferry and Tagliapietra, 2024); public share estimates around 25 percent (EIB 2021; Darvas and Wolff 2022) or around 50 percent for France (Pisani-Ferry and Mahfouz, 2023). ### Required expansion and specific allocation benchmarks - To prevent a critical shortfall, the EU budget would need to more than double its current MFF allocation for EPG priorities; achieving this would require expanding the overall MFF size by at least 50 percent, assuming funding for other programs including the CP and the CAP were kept unchanged. - Digital, R&I: proposal by Draghi (2024) and Competitiveness Compass aim to double the allocation to €200 billion in the next MFF. - Defense: ambition announced by the Defense Commissioner to allocate €100 billion (equivalent to less than 30 percent of the total investment needs estimated by the Commission). - Clean energy transition and energy security: EU budget investment needs calculated based on Commission’s estimates and ECB-weighted public share amount to over €750 billion for the next MFF period. ### Current MFF design: complexity, rigidity, and limitations - The MFF sets seven-year expenditure ceilings with limited margins for reallocation; revision processes often require unanimous member state agreement. - The budget has become fragmented with over 50 programs, overlapping objectives, and multiplicity of sub-headings, increasing administrative burdens and hampering transparency and access to funds. - Example of overlap: digital transition funding available through Horizon Europe, Digital Europe Programme, Connecting Europe Facility Digital portion, and digitalization efforts under ESI Funds. - Flexibility tools within the current MFF: unallocated annual “margins” total €5.5 billion or 0.5 percent of overall expenditure; “special instruments” total €24 billion or 1.9 percent of total expenditure. Combined flexible tools represent 2.4 percent of total expenditure (excluding temporary instruments like NGEU and SURE). ### Streamlining the EU budget and central strategic capacity - Consolidation and clustering of programs around key policy priorities could reduce fragmentation and improve alignment with the next MFF ambitions. - Recommendation: balance the EU budget’s traditional “enabler” role with enhanced centralized capacity to identify and steer EU-wide strategic investments (e.g., increased allocations to Horizon Europe, Connecting Europe Facility, InvestEU, and the Defense Fund to reinforce strategic coordination tools such as the Competitiveness Coordination Tool). - Streamlining and harmonizing eligibility criteria, application processes, reporting requirements, and co-financing rates would alleviate administrative burdens, especially for small and medium-sized enterprises. ### Making the budget more adaptable - The current design’s strict seven-year ceilings and pre-allocated funds (e.g., CP, CAP, Just Transition Fund) limit reallocation; transitioning to an annual model risks undermining predictability. - Pragmatic solution: enhance existing flexibility tools and expand special instruments and margins to respond to moderately sized shocks while preserving safeguards and appropriate governance. - Consolidating budget headings could modestly increase flexibility by reducing compartmentalization of margins; if headings remain many, special instruments should be significantly increased. - An expenditure review, as part of the regular budget cycle, is recommended to assess optimality of allocations and spending effectiveness and to guide mid-term adjustments (reference: mid-term revision in 2023-24 which added €64.6 billion, primarily for the Ukraine Facility). ### Strengthening performance-based budgeting - The RRF exemplifies direct performance-based budgeting by linking disbursements to predefined targets and milestones; RRF contributed to an increase in the share of CSRs where at least some progress was made from 52 percent in 2021 to 69 percent in 2023. - Growth impact of RRF: expected to boost euro area GDP level by 0.4-0.9 percent by 2026; sustained productivity gains drive GDP-level gains to 0.8-1.2 percent by 2031 (Bańkowski and others 2024). - Direct performance-based approaches are suitable where outcomes are closely linked to efforts (notably many CP and CAP funds), and can be used to incentivize accompanying national reforms (examples given: reforms of employment agencies as prerequisite for ESF+ funding; speeding up permitting for windfarms in exchange for ERDF funding). - Cost-based budgeting remains appropriate for competitive, high-risk, cross-border, or indispensable EU-level programs (e.g., Horizon Europe, Innovation Fund, Connecting Europe Facility, humanitarian aid, public health, security and defense). - Performance measurement: indicators should balance ambition and realism across input, output, outcome, and impact measures; outcome indicators preferred where feasible. - Minimize administrative burdens from performance-based budgeting through harmonized reporting, expanded technical assistance, and capacity building—RRF absorption slowed partly by heavy administrative burdens; by end-2024 less than seven percent of available Cohesion Policy funds had been paid out. ### Enhancing deployment of financial instruments - Shift over past decade from grant-based to greater use of financial instruments (loans, guarantees, equity), starting with EFSI (Juncker Plan) and continued under InvestEU (€22.5 billion in guarantees from EU budget; InvestEU aims to mobilize €372 billion). - Financial instruments should target projects with profitable returns where private finance can be leveraged and where “additionality” is clear. - Standardizing and consolidating EIB cooperation mandates with the MFF could unlock tied-up funds, facilitate redeployment, and reduce reporting burdens (current fragmentation: over 130 mandates and over 400 reports annually for EIB). - Safeguards needed: strengthen risk monitoring and mitigation for guarantees, regular evaluations, streamlined governance and reporting, and enhanced technical assistance for beneficiaries. - Note: EFSI reported to mobilize €503 billion additional, but European Court of Auditors (2025) found that this is overstated by €131 billion. ### Financing the next MFF: options and role of EU borrowing - Current MFF financing (excluding temporary NGEU borrowing until 2026) relies largely on GNI-based national contributions (around 0.7 percent of GNI averaged over 2021-23), VAT-based own resources (0.3 percent of each country’s VAT intake, amounting to 0.1 percent of GNI), and customs duties (about 0.1 percent of EU GNI, roughly 15 percent of total budget). Plastic waste contributions are a small share. - Three broad financing options for expanding the budget: - Increase GNI-based national contributions (immediate burden on national budgets; may be financed by national debt). - Introduce new own resources (greater EU budgetary discretion but politically difficult). - Debt-financing (bond financing) backed by increased budget headroom—assessed as the most viable despite institutional and legal challenges. - EU borrowing in current framework is confined to crisis contexts; NGEU was unprecedented (planned issuance of €712 billion) but remains bound by temporary/exceptional criteria and the requirement that borrowing be treated as “other revenues” and remain smaller than own resources. - Limitations of ad-hoc borrowing: creates political uncertainty, delays, and hinders development of EU bonds as liquid, widely-held common safe assets; EU supranational bonds have higher yields and lower liquidity compared to EFSF/ESM/EIB and are excluded from sovereign benchmark indices. - Expanding EU borrowing for normal times could: - Finance EPG investments with better intertemporal alignment of costs and returns. - Develop a more liquid market for common European safe assets, strengthen the international role of the euro, and capitalize on a convenience yield. - Require improved consolidated fiscal reporting and monitoring of contingent liabilities; consolidated EU accounts available for 2021-2023 as of June 2025. - The EU debt after consolidating on-lent assets against member states was €169 billion until 2023 (compared to €740 billion pre-consolidation), a fraction of the €14 trillion general government debt of EU member states. ### New own resources and fiscal safeguards - Treaty requires increased borrowing to be paired with increased claims to cover debt servicing costs (e.g., GNI-based member states’ guarantees to raise the resource ceiling as in the NGEU framework). - Commission’s 2023 proposal for new own resources is expected to generate about 0.2 percent of GNI annually (or €36.5 billion in 2018 prices), which was judged sufficient to cover peak servicing costs of the NGEU grant estimated around 0.1-0.12 percent of GNI. - Using NGEU as a benchmark: the proposed 50 percent budget increase is approximately 1.8 times the size of the NGEU’s grant portion. Phasing in new own resources around 0.2 percent of GNI annually (0.12 percent multiplied by 1.8), with additional buffers, would likely cover full bond-financing of the budget expansion. - Identifying new own resources of this scale is politically challenging; potential revenue sources linked to EU policies include revenues from the ETS, the CBAM, and a possible BEFIT contribution, or a temporary statistical-based own resource on company profits if BEFIT is not agreed. - New own resources tied to EU-level policy benefits could improve fairness by aligning contributions with beneficiaries of EU actions (e.g., capacity charges for cross-border infrastructure usage). - Political feasibility hinges on demonstrating positive-sum benefits to member states; maximizing EPG delivery can shift debates away from zero-sum net contribution framing. *Source: IMF Working Paper excerpt (content unit: wpiea2025114-print-pdf).* ### Conclusion ### Conclusion ### Overall assessment - The Multiannual Financial Framework (MFF) requires an overhaul to facilitate decisive EU-level actions for boosting Europe’s productivity and enhancing its resilience. - The MFF plays a key role both through direct spending and through the indirect coordination of member states’ policies, but it needs structural changes to meet looming demographic and structural challenges. ### Three priority areas for reform - Spending priorities - Emphasize European public goods critical for boosting productivity: spending on research and innovation. - Emphasize European public goods critical for enhancing resilience: investing in energy security, clean energy transition, and defense. - To meet these objectives, the size of the MFF would need to be augmented to at least 1.7 percent of EU GNI from its current 1.1 percent envelope if spending on other programs (such as the common agricultural policy and cohesion policy) were to remain unchanged. - Joint investment at the EU level to achieve common goals in a most cost-effective manner can generate net positive savings at the aggregate, benefiting national budgets. - Design features - Make the MFF more flexible in responding to macroeconomic shocks and changing priorities (for instance through enhancing existing flexibility tools and increasing adaptability within the framework). - Make the MFF more efficient by reducing administrative burdens and streamlining processes. - Make the MFF more effective by incentivizing good performance and crowding in additional resources from national/regional governments and the private sector. - Financing - Reconfigure financing to meet higher needs for European public goods investment. - A bond-financed EU budget with identified own resources for debt services can: - Support a larger spending envelope beyond the amounts resting on direct national contributions at a time of national consolidation efforts. - Potentially enhance macroeconomic stabilization through better risk sharing. - Deliver regular issuances of EU safe assets across the maturity spectrum, creating an EU safe asset benchmark yield curve to anchor pricing of euro-denominated assets and help advance the EU CMU. - Help banks meet regulatory requirements on liquid assets with a more diverse range of securities, thereby contributing to financial stability. ### Implementation challenges and constraints - Any changes must adhere to the limits set by the Treaty governing the EU budget (including ensuring appropriate amounts to key areas such as cohesion and agricultural policies). - The type of overhaul discussed will require unanimous approval from all member states, posing significant legal and political difficulties. - Despite these challenges, the paper argues that such an overhaul may soon prove unavoidable for the EU to decisively meet large upcoming challenges and continue delivering sustained improvements in social and economic outcomes for its citizens. *Source: Conclusion, Working Paper No. WP/2025/114* --- _Source: https://www.imf.org/-/media/files/publications/wp/2025/english/wpiea2025114-print-pdf.pdf_