Overview
In mid-July, the European Commission released its proposed EU budget from 2028-2034, which would elevate industrial investments—such as in digital, energy, and defense infrastructure, often referred to as “European public goods”—over traditional obligations to agriculture and regional development. However, the limited size of the budget proposal—with virtually no real growth compared to the current budget—reflects the EU’s vulnerability to ongoing intergovernmental divides and impulse for lowest common denominator solutions, despite the Commission’s vision to drive industrial policy. Without appreciating a sense of scale for its ambitions, the EU risks defanging itself, unable to address the structural constraints on economic competitiveness in an age of geopolitical turbulence. In turn, European businesses may face difficult decisions to ensure their growth amid the EU’s stagnant macroeconomic outlook.
The Proposed EU Budget, Explained
The European Commission’s proposed budget, or Multiannual Financial Framework (MFF) in Brussels-speak, will allocate the EU’s resources for seven years, from 2027-2034. If that feels far away, that’s because it is. Not only must EU member states unanimously compromise on a vision of what the bloc needs over the next decade, but also consider how the MFF will be financed, which will drive distributive squabbles between member states over the next two years. As much as the budget fight is about resources, it is about a vision over what the EU’s competencies ought to be. As a single policy measure, it will likely be the most important legacy from European Commission President Ursula von der Leyen’s tenure.
The European Commission’s proposal—or, put more bluntly, von der Leyen’s proposal (many Commissioners reportedly did not see the final blueprint until a few hours before the launch)—has kicked off discussions. The final number is €1.816 trillion, or an annual €260 billion, representing a very marginal increase from 1.1% of GNI under the current MFF to a little under 1.15%. However, this number will likely be whittled down over the next two years, as member states, whose contributions comprise the vast majority of EU funding, have voiced concerns over increasing their financial donations to Brussels.
In terms of what is in the MFF, the EU is prioritizing a shift toward more strategic spending. For perspective, farming subsidies under the Common Agricultural Policy (CAP) and regional development grants under Cohesion Funds each make up a third of the current MFF. Under the proposed new MFF, these two buckets together comprise less than half of spending (an annual €123 billion) and will be merged into a single national envelope for each member state, thereby giving Brussels more leverage over states that violate EU rules. Through the relative cuts to the EU’s traditional spending, the proposed budget makes room for a Competitiveness Fund (an annual €58 billion), the main vehicle for Europe’s industrial policy, and a larger Global Europe Fund to support the EU’s Global Gateway strategy and accession reforms of EU candidate countries (an annual €28.5 billion). About a tenth of the budget will go toward debt servicing the EU’s Covid recovery plan, and a tenth toward the EU’s R&D program (about an annual €25 billion each).
Perhaps more controversial is how the EU seeks to raise funds for the budget. The bloc aims to raise €58 billion per year (or, roughly €406 billion in total) through “new own resources”—mainly, funds from established mechanisms like the EU emissions trading system and carbon tariff, but also new EU taxes on tobacco and flat contributions from firms with over €100 million in turnover. This means that €1.4 trillion of the budget will come from contributions from member states—that is, if they can agree to raise their contributions amid rising debt levels and new defense spending commitments.
The Political Absence of “Big Europe”
The limited scale of the budget is striking compared to the ambitious projects endorsed and laid out by the current Commission. The Draghi Report, commissioned by von der Leyen as an informal policy agenda of sorts, calls for an expansive reordering of spending on public goods (like defense and R&D) at the EU level, to the tune of €800 billion per year, to close its productivity gap with the US, shake the EU out of its slow growth, and gain an indispensable foothold within emerging industry value chains to maintain geoeconomic sovereignty. Other analysts, such as at the Bruegel think tank, have suggested more modest measures, calling for the EU to commit at least €300 billion per year (or at least 1.7% GNI) on public goods like cross-border infrastructure, clean technology, and R&D.
Meanwhile, the current proposal, after debt servicing costs and inflation (which may exacerbate as a result of US tariffs), could end up being smaller in real terms than the previous MFF (1.1% of GNI). Spending on European public goods, seemingly nestled under the Competitiveness Fund, rests at about a third of a percent of European GNI—far from the Bruegel recommendation, let alone Mario Draghi’s vision. While the Fund represents a shift in attention to defense and grid infrastructure—each received five times the amount of money from the current MFF—it remains to be seen whether it can steer markets and crowd-in private investment.
If the EU seeks to become a geopolitical player, then its member states must make the difficult choice, as they have done before, to surrender certain competencies to Brussels. But repeated calls for a capital markets union (harmonizing regulation to allow for a single financial market), joint procurement of defense articles and gas, and a digital industrial strategy are met with the same challenge: a political allergy to the expanded authority and resources of the European Commission, what can crudely be called “Big Europe.” The lack of new public resources for the EU is yet another signal that, despite geopolitical challenges, Big Europe lacks enough proponents.
The political opposition to Big Europe is not so much ideological—in the European Parliament, leaders in both the conservative European People’s Party and left Socialists & Democrats umbrella groups, regardless of minute differences, have expressed frustration with the puny budget—but rather a consequence of familiar intergovernmental patterns. The frugals, namely Germany and the Netherlands, are opposed to contributing additional resources to the EU, the proposed corporate tax, or filling fiscal shortfalls with joint debt, but they do commend the Commission’s focus on more strategic sectors (which will benefit their heavy industry). Meanwhile, indebted France, Spain, and Italy have called on the EU to at least double its budget—if not by member state contributions, then through joint borrowing or extrabudgetary authorities—to meet the fiscal moment for Europe’s competitiveness. The Balts, anxious over war with Russia, have called for the Commission’s proposal to be a floor, not a ceiling, on the EU’s spending ambitions, particularly for defense.
“Little Europe” in Rough Times
Two years is both a lot of time and, in Brussels, no time at all. Next, national capitals will begin slowly consulting each other on the Commission’s proposal and, with limited appetite for drastic EU action, likely consider a skinnier budget. However, these negotiations will not just be a game of distributive politics, but also come as the EU reacts in real time to external challenges that may mobilize calls for a Big Europe.
The first major pressure is defense. Most EU member states are also members of NATO and made new commitments to spend 3.5% of their GDP on hard defense spending (for reference, this would have created an additional €274 billion European fiscal burden just in 2024, which is over the EU’s proposed annual budget entirely). The EU took an unprecedented step to approve a €150 billion vehicle, backed by Eurobonds, to lend money to member states and create fiscal leeway on defense spending The EU will have trouble expanding borrowed defense cash or approving a new extrabudgetary defense Fund without the EU becoming a fiscal union, this would necessitate unpopular measures, like taxes or dedicated allocations from a future MFF. But with the precedent broken and the impetus to rearm, especially amid the US force posture review and a predicted $19 billion shortfall in Ukraine’s war budget, it is not impossible.
Second, the EU will navigate trade pressures. Despite an initial framework to ease trade tensions with the US, the prospect of reopened tensions and the new reality of a fragmented trade order have revised growth expectations downward. While the euro has grown stronger at the expense of the dollar, this will stall Europe’s ability to rekindle exports, contributing to the bloc’s continued slow growth. The EU’s trade deal with the US included expansive commitments to procure American defense tech, energy, and chips, in addition to investing in US value chains; this, in addition to the EU’s constrained fiscal environment, could embolden calls for coordinating EU-wide procurement, completing a capital markets union, and expanding available equity for industrial policy (such as through multilateral banking or a sovereign wealth fund).
Finally, the EU will consider enlargement. By 2034, the EU could feasibly expand beyond its 27 members to include the six Western Balkan candidates, Moldova, or Ukraine. The drive to enlarge is primarily geopolitical—the bloc seeks to prevent Russian influence in Europe, consolidate European industrial supply chains, and potentially offer Ukraine a security guarantee in the form of the EU’s overlooked mutual defense clause—but admitting new members, many of whom have a GDP per capita less than half of the EU average, will create new fiscal pressure for agricultural and regional development subsidies. This will necessitate an adjustment of the MFF, with some costs feasibly offset by the Global Europe Fund, but this fiscal hole may increase calls for some financial flexibility in the MFF.
The Risks
The problem is not insufficient spending in Europe—in 2023, public spending accounted for 49% of the EU’s GDP—but rather inefficient spending, where, for example, only about a tenth of R&D occurs at the EU level and investments in defense and energy remain in the hands of national governments. The Commission’s proposed MFF for 2028-2034, in its current status, locks-in a Little Europe vulnerable to the power of the US, China, and emerging players like India.
The emphasis on industrial investments is a welcome shift in priorities, but the means to finance this pivot—pulling from traditional spending buckets as opposed to expanding resources—ultimately constrains the scale of Competitiveness Fund. In the long run, these signals will do little to alter the EU’s structural challenges, including high energy prices, fragmented financial markets, and weak consumer demand. In turn, European businesses will continue to face a stagnant macroeconomic outlook, forced to make difficult decisions to ensuretheir own growth. Moreover, the EU budget’s current construction carries political risks. The regressive corporate tax for large EU companies—based not on profit but on a threshold of turnover—has clashed with the EU’s mandate to simplify regulations and rekindle growth. The decision to cut agricultural and regional subsidies, the core of the EU’s social contract, may further marginalize farmers and the countryside, mobilizing support for Euroskeptic movements.
