the EU’s draft budget for 2028-2034
However distant these years may seem, it is, in fact, not too early to raise questions about the EU’s financial planning for this period, given that the 27 EU Commissioners have already started to agree on the EU’s next seven-year central budget. Negotiations on the multiannual financial framework (MFF) usually drag on for years and accompanied by many conflicts between Member States, but the current situation is considered to be especially and unprecedently complex. This article explains why things are so complicated.
The situation is much more complicated than ever before
According to expectations, the EU’s financial stability will likely to be affected by both very tough external and internal factors such as the US tariff war against the EU announced by US President Donald Trump and plans to boost the EU’s defence capabilities, not to mention Ukraine’s further support, including the country’s possible future EU membership. These challenges are likely to put an unprecedented burden on the EU.
The situation is further complicated by the fact that the issue of repayment of the EU’s €300 billion joint borrowing – a joint debt program to rescue the EU economy after the Covid pandemic – is hanging over the head of the European Commission as a certain sword of Damocles considering that the repayment should start from 2028 which means that the EU has to come up with a repayment plan before this date.
One of the options would be for the Commission to postpone the repayment of its debt. As it was revealed from a Spanish government document, Spain supported this approach, but Germany and its fiscally conservative allies see this as a slippery slope toward a fiscal union, in which the Commission permanently takes on the debts of its 27 members. You will find more details below.
Before explaining the situation in Germany which is significant from the perspective of the Commission’s efforts to find a solution to EU’s problems, it is worth taking a brief look at the global geopolitical map.
And then came Trump…
In a completely new era that has started with Donald Trump’s return to the White House, the European Commission seems to be determined to adapt the budget not only to its political program but also to the geopolitical challenges the EU faces. To meet the requirements and goals, the EU must give funds to those sectors which can generate big returns.
And we have just arrived at the issue of strengthening the bloc’s defence sector which can either be a really good solution to the problems or it can be destroy Europe, depending on what other issues the Commission tries to attach to the issue of defense spending.
’Europe needs, basically, a surge in defence. And for that, our defence industrial base must be strengthened,’ European Commission President Ursula von der Leyen said after a summit on defence in Brussels in early February.
However EU countries have raised their defence budgets significantly in recent years due to the Russia-Ukraine war, the real shift was triggered by US President Donald Trump’s demand for European NATO members to boost their defence spending. In its article ’Trump shocks Europe into defence spending shakeup’, Bloomberg called recent European plans the region’s biggest security initiative since the Cold War.
The problems of the EU economy have been known for some time. The so-called Draghi report – a report by former European Central Bank chief Mario Draghi on European comptetitiveness – released last year painted a dramatic picture. The document pointed out that to preserve competitiveness, the EU needs to invest an additional €800 billion through common loans, unless it jeopardises its geopolitical strength.
The report was, interestingly, published almost at the same time when Europe is left alone in the struggle to support Ukraine following Washington’s decision to halt military aid to Kyiv, and when US President Donald Trump suggested NATO members should allocate 5% of their GDP to defence. (Last year, EU countries spent an average of 1.9% of GDP on defence.)
New solutions both by frugal Germany and spender France
While it has become clear that the Commission needs to adapt the budget to the bloc’s geopolitical challenges, it should also be noted that the situation is further complicated by the fact that Germany and France, two key strongholds of the EU, are facing serious economic problems in a period when the EU strongly needs both an economic stability and a growth. The fact that, in recent years, it was often Germany that stood up against French efforts for greater spending on the European economy and for more European defense projects, is an interesting detail in the big picture.
After America’s withdrawal of military support to Ukraine, Berlin decided to abandon its old school fiscal orthodoxy. The head of the center-right Christian Democratic Union (CDU) and Germany’s likely new chancellor Friedrich Merz is not only suggesting loosening the country’s debt brake but is also pushing the EU at large to relax spending rules so the whole continent can dramatically boost its defense programs. After a unique deal with outgoing German Chancellor Olaf Scholz and his SPD, Merz decided to reform a national debt brake and to push to exempt defence spending from the EU’s debt and deficit limits. ’In view of the threats to our freedom and peace on our continent, ‘whatever it takes’ must now also apply to our defense,’ Merz said, referring to the Draghi report.
As for France, President Emmanuel Macron said European countries need to start spending more than 3 percent of GDP on defense. To raise money for an increase in defense spending, Paris is looking for .According to French economy minister, France’s plans to increase defense spending to more than 3 percent of GDP may require more taxes on the rich and setting up defense-focused investment funds for private actors. In addition, the French authorities are looking into whether frozen Russian assets (€200 billion) can be used to guarantee new loans to Ukraine
The Spanish way of thinking
According to the Spanish government, a common loan-based mechanism financed by joint borrowing would sustain strategic investments and finance European public goods. While the idea of more joint debt is popular in countries with higher borrowing costs such as Spain, France and Italy, it has long been strongly opposed by Germany. Madrid also pushes the postponing when the EU’s €300 billion debt is paid back to try to improve cash flow which can be an option, however, the so-called frugal countries see this idea as a slippery slope toward creating a fiscal union where the Commission permanently takes on debt on behalf of its 27 members
The Commission’s plans
A European Council summit dedicated to defense and Ukraine has been organised on 6 March when among other topics, EU leaders discussed ways to fund increased military expenditures. The European Commission estimates EU defence investment needs 500 billion euros over the next 10 years.
According to von der Leyen, the ReArm Europe Plan, presented to the leaders of EU countries, consists of five parts with several proposals and focuses on how to use all of the financial levers at the disposal of Brussels – in order to help Member States to quickly and significantly increase expenditures in defence capabilities. If Member States would increase their defence spending by 1,5% of GDP on average this could create fiscal space of close to EUR 650 billion over a period of four years, the Commission President claims.
What price to pay for these plans?
To conclude, the EU obviously and urgently needs a new, pragmatic consensus on how to cope with new challenges and reach the necessary economic growth at the same time. Without an ‘urgency mindset’ and a strategic plan, Member States can only watch EU money flow out of the region while they face not only US tariff war but a strengthening Russia on the one hand and, a war-torn Ukraine aspiring to EU membership on the other.
Without asking what price to be paid for all this, to be aware of the above details seems to be pointless.
As a result of the centralisation of the fiscal policy, the interests of the Member States can be more and more marginalised, and individual Member States will no longer be in a position to adapt their budgets to their own priorities. Given that Member States have very different interests and resources, this is certainly not a sustainable long-term solution. Introducing new taxes and increasing economic and social inequalities between Member States also seem unavoidable.
No doubt, the repayment of the €300 billion loan jointly borrowed by the EU countries is just another step for the bloc towards the United States of Europe, not to mention the fact that the idea of of joint borrowing splits the bloc. As the EU shifts away from a Europe of nations, this step can seriously threaten the sovereignty of Member States. If the EU moves towards fiscal union under the pretext of debt settlement, the price European citizens will pay for this will surely be too high.
Since central budget is an issue that deeply concerns both the EU as a whole, and the individual Member States, it should be resolved through extensive consultation with the representatives of all Member States. Despite there is a formal protocol for this very process, the budget issue, sadly, is not expected to be decided by formal consultative bodies, but instead, in backrooms, in line with the good old tradition in Brussels. According to some rumours, the Commission has already started such informal consultations with some Member States on the draft MFF. Only with the ones that would push the EU towards a common debt settlement and thus a fiscal union.
What responsibility can be expected from the political leadership of the EU if the bloc’s financial planning and central budget turns out to be a fiasco – something that will only be discovered five or eight years later? What if the ’dream big – spend big’ idea fails?
We all know the answer since it is usually the Member States and the European citizens who pay the price for the Commission’s bad decisions.
