Making the MFF Fit for Purpose

IMF News, May 20, 2025

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Speech by Alfred Kammer, IMF European Department Director, at the Annual EU Budget Conference.
Date: May 20, 2025.
Core message: the Multiannual Financial Framework (MFF) requires a comprehensive overhaul to address structural changes, demographic aging, rising geopolitical and trade tensions, increased defense spending, and the clean energy transition.

The current MFF has supported cohesion policy and recovery efforts (NextGenerationEU launched in 2020) but is insufficient for the scale and nature of emerging challenges.
The MFF’s current size and structure do not match the expanding list of challenges requiring EU-level responses.
Coordination at the EU level can generate efficiency gains; in the case of clean energy transition investments, improved coordination could reduce aggregate costs by approximately 7 percent.
The MFF currently comprises more than 50 budgetary programs, creating complexity and administrative burden.

Objective: prioritize areas where EU action yields greatest value by generating positive spillovers, leveraging economies of scale, and avoiding duplication.
Target areas: energy security, defense capabilities, research and innovation.
Numeric targets and implications:
- Increase expenditures targeted at European public goods from 0.4 percent of GNI currently to at least 0.9 percent.
- Doing so without reducing allocations to existing programs would imply increasing the MFF budget by at least 50 percent for the 2028–2034 period, from 1.1 percent of GNI to 1.7 percent of GNI.
Expected fiscal effect: more EU spending on public goods would reduce the burden on national budgets and, through coordinated investment, produce net savings due to greater efficiency.

Performance focus:
- Expand systematic links between financial support and outcomes (modelled on the Recovery and Resilience Facility).
- Apply performance-based incentives across more areas, especially where incentives can catalyze national and regional reforms.
- Maintain simplicity and transparency to avoid implementation and accountability problems.
Streamlining and modernization:
- Consolidate the more than 50 budgetary programs into a smaller number of thematic clusters organized around key policy priorities.
- Harmonize requirements across programs to reduce administrative burden and improve accessibility and implementation.
- Leverage local and regional expertise to tailor solutions to context-specific needs.
Adaptability:
- Equip the MFF with a greater margin for reallocation within the budget and stronger flexibility instruments backed by sufficient resources.
- Use mid-term review processes within the regular budget cycle to respond to changing realities and shocks.

Financing challenge: a more ambitious MFF requires enhanced financial capacity beyond national GNI-based contributions.
Borrowing:
- Establish or expand borrowing capacity to support initial investment scale-up and smooth the fiscal impact for member states over time.
- Bond-financing can support development of a European safe asset and advance capital market integration and macro-financial stability.
Own resources:
- Progress on new own resources is essential to finance existing debt obligations under NextGenerationEU and to underpin future borrowing.
- Commission proposals highlighted include revenue based on the Emissions Trading System, the Carbon Border Adjustment Mechanism, and potentially a harmonized corporate tax base under the “Business in Europe” initiative.
Additional revenue options:
- In the longer term, user fees on jointly funded infrastructure linked to European public goods may play a role, although the scope is limited for now.

Increase EU-level spending on European public goods toward at least 0.9 percent of GNI and expand the MFF to at least 1.7 percent of GNI for 2028–2034 if existing programs are maintained.
Prioritize investments in energy security, defense, and research and innovation to maximize spillovers and economies of scale.
Expand performance-based budgeting across the EU budget while keeping frameworks simple, transparent, and tailored to local contexts.
Consolidate budgetary programs into thematic clusters and harmonize requirements to reduce complexity and administrative costs.
Build greater reallocation margins and flexibility instruments, and institutionalize mid-term review within the budget cycle.
Enhance financing via borrowing capacity and new own resources (including Emissions Trading System revenue, Carbon Border Adjustment Mechanism revenue, and potential harmonized corporate tax base under the “Business in Europe” initiative).
Explore limited additional revenue sources linked to European public goods, such as user fees on jointly funded infrastructure.

Potential outcomes: a more united, more competitive, and more secure Europe with improved resilience, support for reform, and strengthened sovereignty.
Political reality: reforms to increase the budget, redesign structure, and broaden financing will require political consensus across member states.

Opening Remarks by Alfred Kammer, IMF European Department Director, May 20, 2025.