Fighting for a financial framework: the EU needs a modern budget, not more money

The European Union faces mounting pressure to revise its multiannual budget for the period 2028–2034, with calls growing louder for cuts rather than expansion. The European Commission’s proposed budget, which would amount to two trillion euros over seven years, up from the current 1.3 trillion euros for 2021–2027, has drawn sharp criticism from several key member states. Germany’s Chancellor Friedrich Merz, along with leaders from Austria, Scandinavian countries, and the Netherlands, has made it clear that the plan must be significantly reduced. These nations have aligned in pushing for a more restrained financial framework, emphasizing fiscal responsibility amid broader economic challenges. Negotiations are entering their critical phase, with all parties agreeing to reach a resolution by the end of this year. This timing is crucial given the upcoming elections in Spain, France, and Italy in 2027, which could complicate efforts to secure compromises later. The current budget allows for spending equivalent to 1.1 percent of the EU's GDP, already exceeding the previously agreed one percent ceiling. The new proposal would push this figure to 1.26 percent, raising concerns among critics who argue that such an increase is neither feasible nor justified under present conditions. The European Commission maintains that the proposed budget expansion is necessary due to ongoing crises, including the aftermath of the pandemic, Russia’s invasion of Ukraine, high energy prices, and geopolitical tensions involving the United States and China. According to the commission, the existing budget focuses too heavily on agricultural subsidies and regional development, failing to address contemporary issues like defense, migration, and enhancing competitiveness. However, the argument for increasing funding hinges on the assumption that major contributors, particularly Germany and other economically robust states, can afford to bear the additional costs. Critics argue that expanding the EU budget through new taxes or increased borrowing does not resolve the underlying issue. National finance ministers would still need to contribute substantial sums, potentially reducing domestic revenue. Additionally, proposals for delaying repayment of debts incurred during the pandemic or creating new debt mechanisms risk moving the EU closer to a fiscal union, a concept many member states remain wary of. Instead, the consensus appears to lean toward trimming existing expenditures rather than seeking new financial avenues. Efforts to modernize the EU budget require a fundamental shift in priorities. Traditional areas of expenditure, such as agricultural and structural funds, face scrutiny for lacking demonstrable economic benefits. Calls for reductions in these sectors are gaining traction, despite resistance from stakeholders who rely on them. The challenge lies in balancing the need for reform with political realities, especially as powerful interest groups resist changes that could affect their financial interests. In parallel, former European Central Bank President Mario Draghi has formed a new initiative called the “Rhine Group,” aimed at revitalizing discussions around improving the EU’s competitiveness. While the group includes notable figures from politics, economics, and business, its influence on actual policy-making remains uncertain. Discussions within the group highlight the ongoing debate over whether increased public investment, funded through debt, can effectively enhance economic performance. This approach contrasts sharply with calls for reducing bureaucratic hurdles and fostering internal market efficiency. The push for greater EU financial autonomy continues to draw attention, particularly regarding the potential for long-term debt arrangements. Although the EU had initially framed pandemic-related borrowing as temporary, there are indications that some member states support making it permanent. This stance reflects broader concerns about managing national debt amidst rising interest rates, although opposition persists, notably from the Netherlands and Scandinavian countries. The European Commission’s leadership, particularly President Ursula von der Leyen, has shown a willingness to align with proposals that expand the EU’s financial role, partly to maintain political influence. Her support for initiatives involving state-funded projects in defense, infrastructure, and industry underscores a strategic focus on securing resources through both direct contributions and shared liabilities. However, the sustainability of such policies comes into question as the EU’s overall debt levels rise, with recent increases in bond yields offering a glimpse of future risks should Germany’s commitment to maintaining the EU’s creditworthiness falter.