IMF Working Papers

The European Union’s budget—known as the Multiannual Financial Framework (MFF)—has over time been a key tool for enhancing economic efficiency, achieving redistribution, and helping the Union tackle pressing challenges. As the Union navigates an increasingly complex global environment and faces looming structural and demographic changes, it is increasingly evident that decisive EU-level actions will be needed to boost productivity and resilience. The MFF is a critical policy lever that can enable the needed EU-level actions. This paper argues for three key changes to the next MFF (2028-34) to help the budget play this role. First, bottom-up estimates of investment needs suggest that spending on European Public Goods to boost productivity and resilience needs to be increased to at least twice the current level. While this would require an at least 50 percent increase in the budget’s size or about 0.6 percent of EU GNI annually (if spending on programs such as the Cohesion Policy and Common Agricultural Policy is kept unchanged), focusing on activities that maximize positive externalities and reduce costly duplication can generate net positive values for member states. Second, reforms are needed to make the budget more streamlined, responsive to evolving needs, and more effective by incentivizing good performance. Lastly, the financing framework should be strengthened by integrating borrowing as a regular tool, alongside greater own resources to bolster debt service capacity. Increasing own resources by about 0.2 percent of GNI annually to cover peak debt servicing costs along with additional reserves for unexpected challenges would likely provide financial security to support the proposed increase in the budget. A clearer focus on strategic investments and measurable outcomes will reinforce the budget’s positive sum value, helping build support for a more ambitious EU budget.