Analysis

European public goods: the time for action is now

New priorities, including defence and energy security, justify a European public goods approach – for which spare financial capacity can be used

Publishing date
15 January 2025
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Introduction

At around 1 percent of GDP – a level unchanged since the 1980s – the EU budget pales in comparison to the United States federal budget (around 22.5 percent of GDP in 2023) and the national public spending of EU countries (almost 50 percent of GDP in 2022). In the EU, of course, spending responsibilities are split, with social protection, health, education, defence and debt service funded from national budgets while at EU level, a large, though gradually declining, share of the budget has traditionally gone to the common agricultural policy and cohesion funds – money intended to help lagging parts of the EU to catch up.

The general principle of public spending is that governments should only interfere with the provision of goods and services when there is a market failure. Otherwise, provision should be left to the private sector. In the EU, there is an extra layer. The EU should only step in when a market failure is supplemented by a national public failure: the EU should intervene whenever private agents or national budgets fall short of financing goods that would benefit the EU as a whole. This is the principle behind European public goods (EPGs) – public services financed through common EU resources and delivered directly from the central level or via the national level.

EPGs can be defined as “policies and initiatives whose value to the citizens are higher when conducted at EU rather than at national level” (Fuest and Pisani-Ferry, 2019). As the EU’s priorities change, often in response to dramatic external developments, the question has arisen of whether some public goods typically provided at national level would be more efficiently provided at EU level. Vaccine procurement during the COVID-19 pandemic was one example. The EU has also effectively doubled its budget in the post-pandemic period (2021-2026) through the NextGenerationEU (NGEU) initiative, under which €800 billion was raised for economic recovery (5.5 percent of EU GDP in 2021, therefore about 1 percent per year for five years).

In favour of provision of public goods at the EU level are greater economies-of-scale and stronger cross-border spillovers of the good (leading to under-provision if left to the national level). In favour of provision at the national level are differences in national preferences and better information held at the national level (Claeys and Steinbach, 2024).

New European political priorities lend themselves more than ever to EPGs

Obviously, the case for major EPGs should be examined area-by-area. The 2024-2029 European Commission has started with priorities that have shifted significantly compared even to five years ago. There is now a dual focus: on “strengthening EU security and defence, and protecting EU citizens; preparing for a bigger and stronger Union; pursuing a comprehensive approach to migration and border management” and on “bolstering the EU’s competitiveness; making a success of the green and digital transitions; promoting an innovation- and business-friendly environment” 1 See https://european-union.europa.eu/priorities-and-actions/eu-priorities/e…. . The first focus lends itself directly to EPGs. The second would need the right policy enablers to allow the private sector to prosper in this space, with EPGs as enablers.

In response to shifting priorities, good candidates for EPGs (beyond current EU-level provision) are defence and security policy, external border control, energy transition infrastructure (including renewable energy, railway infrastructure, roll out of electric public transport and vehicle infrastructure), parts of research and development that need public support (such as security intelligence) and EU stockpiling to prepare for pandemics and natural disasters. These goods have strong network effects, ie the benefits increase when they are rolled out in more countries, and/or they lead to savings when delivered at the EU level.

In terms of savings from EPGs, common procurement of vaccines meant the EU paid lower prices than other parts of the world 2 Michael Birnbaum, Christopher Rowland and Quentin Aries, ‘Europe is Paying Less Than the U.S. for Many Coronavirus Vaccines’, Washington Post, 18 December 2020, https://www.washingtonpost.com/world/eu-coronavirus-vaccines-cheaper-th…. . Similarly, joint energy procurement enhances bargaining power when negotiating with the major energy providers globally; the same applies to weapons purchases, for which, moreover, unnecessary duplication can be avoided. In a geoeconomically fragmenting world, trade wars and tariffs will become more prevalent. A greater role for the European Commission will boost the EU’s negotiating position.

EPGs have broader macroeconomic benefits. The results from centrally funded research and development will become broadly available, benefitting firms throughout the EU. Investment in energy transition infrastructure will stimulate demand from, and innovation by, firms involved in the transition. Rolling out clean-energy infrastructure at scale can turn clean-energy solutions into an export advantage for the EU. Overall, EPGs can be expected to boost both longer-run potential output and shorter-run demand (Beetsma and Buti, 2024).

Welfare effects from EPGs would come on top of efficiency gains. One example could be an EU-level coordinated and financed upgrading of EU electricity grid capacity, which would exceed the outcome of separate upgrading by each EU country, and which could be done at a cost that is less than proportional to the greater capacity, because of the more efficient balancing of demand and supply. In this case, welfare gains would arise from both specialisation and gains from trade (energy generation where it is most effective) and the overall level of public goods (undersupply with decentralised provision, as spillovers are not internalised).

Arguing in favour of EPGs

Though the benefits of some EPGs seem obvious, getting agreement on them can be hard, for three main reasons:

  1. There is a fear that funding for EPGs may not be used in an appropriate way. To mitigate this fear, conditionality can be applied, similar to what was done with NGEU and European Financial Stability Facility/European Stability Mechanism (EFSF/ESM; see below). In addition, rule-of-law conditionality aimed at protecting the financial interests of the EU should be applied 3 This is governed by the EU rule-of-law conditionality regulation (Regulation (EU, Euratom) 2020/2092), which adds an “additional layer of protection in cases when breaches of the rule of law principles affect or risk affecting the EU financial interests”. For a proposal to apply it to EPGs, see Bakker et al (2024). .

  2. Some countries might perceive that they benefit on net less from some EPGs than others. To counter this, EPGs could be combined in a package so all countries would see a net benefit. A shift within the EU budget towards EPGs could in fact reduce the amount of redistribution, which some countries do not like.

  3. There is a fear that EPGs result in an overall increase in the tax burden. However, to the extent that public goods provision shifts from national to EU level, the overall tax burden should fall, because of economies-of-scale in public-good provision.

Financing EPGs: can the European Stability Mechanism help?

The benefits from EPGs apply irrespective of how they are financed. However, the means of financing matters. When it comes to long-term investment activity, which is a feature of important EPGs such as energy, digital and defence infrastructure, the EU budget is the natural source of financing. However, its size and composition are a status quo that has proved difficult to change because of vested interests and a fear on the part of some countries that their net contribution will increase further – while overlooking the beneficial welfare effects of EPGs.

Nevertheless, EU budget spending has shifted gradually over time. In the 1970s, 90 percent went to the common agricultural policy. In 2022, this was down to less than 20 percent, while the share spent on EU cohesion rose from almost nothing to over 50 percent in 2022 (Mourlon-Druol, 2024). Past spending allocations have been driven more by political arguments than by economic arguments, but the combination of the current political responses to geopolitical and climate developments and the economic benefits of EPGs should facilitate the debate around them. The next EU budget cycle will run from 2028 to the early 2030s and debate in preparation for it provides an opportunity for discussion of EU spending.

In the context of the difficulty of increasing the size of the EU budget, and of creating a successor to NGEU, the first step in optimising EPGs should be to maximise the capacity of existing instruments, without calling on additional taxpayers’ money. One such existing instrument is the European Stability Mechanism (Scazzieri and Tordoir, 2024), set up in the wake of the euro-area crisis to provide financial assistance to euro-area countries in severe financial distress. The ESM 4 The ESM treaty allows lending to euro-area countries. But a parallel mechanism to support non-euro area countries could be established, as foreseen for the Single Resolution Fund backstop. A treaty change could also permit lending to third countries, such as Ukraine.  has €422 billion in available capacity (due to grow as Spain and Cyprus make scheduled repayments). With the ESM funds, plus €300 billion to €400 billion from the European Commission and a possible extension of the European Investment Bank’s balance sheet, an additional €1 trillion could be made available for EU defence, security and border financing (Anev Janse and Beetsma, 2024).

Borrowing from the ESM for EPGs might stimulate EU countries to both coordinate European public spending, for example to find synergies in defence spending and avoid duplication, and to invest more in defence to fill the EU EPG gap. Obviously, any borrowing needs to be repaid. However, ‘wasted’ expenditure (such as in defence and security) will be avoided compared to countries providing these goods in an uncoordinated way. Shifting public good provision from national to EU level should allow lower domestic taxation (point 3, above). Another major advantage of borrowing through the ESM is that – as a permanent institution with paid-in capital – it can issue bonds at favourable rates. If ESM lending broadens out beyond traditional distressed-country lending, its balance sheet would become more diversified and even safer, and hence could be leveraged further while maintaining strong market attractiveness.

The ESM can provide European financing for certain EPGs when the euro area is threatened by financial-stability risks. In the pandemic, the ESM introduced the Pandemic Crisis Support credit line 5 See https://www.esm.europa.eu/content/europe-response-corona-crisis.  to help euro-area countries cover medical and healthcare expenditures. Letta (2024) proposed a similar approach for defence financing, with a €240 billion credit line to spend on defence. Another option could be to use the ESM Precautionary Lines and Primary Purchase Programmes to help sovereigns that face financial-stability risks (Anev Janse and Beetsma, 2024). These are examples of EPGs in the scope of the ESM’s current mandate. For other EPGs, borrowing through the ESM would require the political will to change the ESM Treaty.

European issuers (the EU, EFSF/ESM and EIB) price between France and Germany at the moment, which would mean cost savings not only for France, but also for Spain and Italy. By contrast, some countries would pay more. However, an interest payment schedule can be designed to distribute the cost savings in such a way that all EU countries can borrow more cheaply via the European institutions than through national borrowing. If the pricing is adjusted based on the rating, the financing can be attractive for all countries, including Germany and the Netherlands.

Figure 1 shows European safe asset ESM pricing below the euro-area-GDP-weighted pricing of euro-area countries. It is lower than for 16 of the 20 euro-area countries. The cost advantage could be spread over the 20 euro-area countries and result in more than €5 billion in savings over 10 years 6 A 0.08 percent annual cost saving over €800 billion with 20 percent European public borrowing is a saving of €128 million/year. We assume the borrowing goes up to 10 years (2025-2035) on markets (€128*10 yrs+€128*9yrs+€128*8yrs+€128*7yrs+€128*6yrs = €5.12 billion). . Additionally, more AAA European safe assets could tighten the pricing further because of size and liquidity, and increase further the cost advantage for European borrowers.

Figure 1: Euro-area 10-year yield levels

Asset 4

Some conservative countries might argue that large-scale borrowing via the European institutions may expose them to additional risk compared to direct borrowing from the market. However, the combination of diversified borrowing with the official, preferred creditor status of the ESM makes any such additional risk minimal (Leandro and Zettelmeyer, 2019). 

Governance and incentives

EU countries have insufficient incentives to finance EPGs, at least at an adequate level. The European Commission, with the help of the European Parliament, is thus the natural initiator of proposals for EPGs, which EU countries in the European Council would then decide on. Such proposals are more likely to succeed if EPGs can be financed from the EU budget (either through debt issuance and future contributions or own resources). Short of that, the European Commission could make EPG proposals and coordinate the relevant financiers. The EIB can provide loans to the public and private sector, which are repaid by taxation from the public sector and profits from the private sector. The ESM can provide loans to sovereigns, with repayment via taxation in the sovereigns.

In summary, a shift in the priority topics for governments means there is a greater need than ever for EPGs. Defence should be the first area in which to step up EPG supply; it may also be the most politically feasible area. Financing it together will strengthen Europe’s position on the markets and will save money for EU citizens.

We thank Pierre Gramegna, David Pinkus and Jeromin Zettelmeyer for comments. The views expressed are those of the authors and are not necessarily shared by any of the institutions they are or were affiliated with.

References

Anev Janse, K. and R. Beetsma (2024) ‘Financing Europe’s grand ideas’, VoxEU, 13 November, available at https://cepr.org/voxeu/columns/financing-europes-grand-ideas

Bakker, A., R. Beetsma and M. Buti (2024) ‘Investing in European public goods while maintaining fiscal discipline at home’, Intereconomics 59(2): 98-103, available at https://www.intereconomics.eu/contents/year/2024/number/2/article/investing-in-european-public-goods-while-maintaining-fiscal-discipline-at-home.html

Beetsma, R. and M. Buti (2024), ‘Designing conditionality in the supply of European public goods’, Working Paper 20/2024, Bruegel, available at https://www.bruegel.org/working-paper/designing-conditionality-supply-european-public-goods

Claeys, G. and A. Steinbach (2024) ‘A conceptual framework for the identification and governance of European public goods’, Working Paper 14/2024, Bruegel, available at https://www.bruegel.org/working-paper/conceptual-framework-identification-and-governance-european-public-goods

Fuest, C. and J. Pisani-Ferry (2019) ‘A Primer on Developing European Public Goods’, EconPol Policy Report 16, European Network for Economic and Fiscal Policy Research

Leandro, A. and J. Zettelmeyer (2019) ‘Creating a European Safe Asset without Mutualizing Risk (Much)’, Working Paper 19-14, Peterson Institute for International Economics, available at https://www.piie.com/sites/default/files/documents/wp19-14.pdf

Letta, E. (2024) Much More Than a Market, report to the European Council, available at https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market report-by-enrico-letta.pdf 

Mourlon-Druol, E. (2024),‘An uphill struggle: a long-term perspective on the European public goods debate’, Policy Brief 24/2024, Bruegel, available at https://www.bruegel.org/policy-brief/uphill-struggle-long-term-perspective-european-public-goods-debate

Scazzieri, L and S. Tordoir (2024) ‘European Common Debt: Is defence different?’ Policy Brief, Centre for European Reform, available at https://www.cer.eu/sites/default/files/pb_LS_ST_defence_bonds_5.11.24.pdf

About the authors

  • Kalin Anev Janse

    Kalin Anev Janse is the Chief Financial Officer and Member of the Management Board of the European Stability Mechanism (ESM) and European Financial Stability Facility (EFSF). He is Executive in Residence at IMD Business School and affiliated to the University of Amsterdam in terms of economic and financial research. He Chairs the CFO community at the World Economic Forum.

    He has over 20 years of experience in strategy, corporate finance, and financial services, working at the European Stability Mechanism, European Investment Bank, McKinsey & Company, and JPMorgan. He studied MSc. Business Administration at the Rotterdam School of Management and Wharton at the University of Pennsylvania and BSc. Business Administration in Finance, Banking and Insurance at the Vrije University Amsterdam.

  • Roel Beetsma

    Roel Beetsma is Dean of the Faculty of Economics and Business of the University of Amsterdam and Professor of Macroeconomics. He is also Visiting Professor at Copenhagen Business School and Research Fellow of the CEPR and CESifo. He was a Member of the European Fiscal Board, the Supervisory Board of ASR Vermogensbeheer and the Supervisory Board of the pension fund for the Dutch retail sector. He has held visiting positions at DELTA (Paris), the University of British Columbia (Vancouver), the University of California in Berkeley and the EUI Florence. He has been a consultant for the ECB, the European Commission and the IMF. He was the Chair of a Dutch government commission on the European economy and Member of a Dutch government commission on second-pillar pensions. His research has been widely published in such journals as the American Economic Review, the Journal of Economic Literature and the Economic Journal.

  • Marco Buti

    Marco Buti, holds the Tommaso Padoa-Schioppa Chair in economic and monetary integration at the European University Institute. Former Chief of Staff of the Commissioner for the economy, Paolo Gentiloni, and until 2019, Director-General for Economic and Financial Affairs at the European Commission (DG ECFIN). 

  • Klaus Regling

    Klaus Regling was the first Managing Director of the European Stability Mechanism and the CEO of the European Financial Stability Facility (EFSF), a position he has held since the creation of the EFSF in June 2010 until his retirement in October 2022.

    Klaus Regling (*1950) has worked for 50 years as an economist in senior positions in the public and the private sector in Europe, Asia, and the U.S., including a decade with the IMF in Washington and Jakarta and a decade with the German Ministry of Finance where he prepared Economic and Monetary Union in Europe. From 2001 to 2008, he was Director General for Economic and Financial Affairs of the European Commission.

    During 2008-09, he spent a year at the Lee Kuan Yew School of Public Policy in Singapore where he researched financial and monetary integration in Asia. Subsequently, he opened an economic and financial consultancy in Brussels. Previously, Klaus Regling had gained experience in the private sector as Managing Director of the Moore Capital Strategy Group in London (1999-2001) and as an economist with the German Bankers’ Association. Mr. Regling studied economics at Hamburg and Regensburg.

  • Niels Thygesen

    Mr Thygesen was Chair of the European Fiscal Board from 2016 to 2024. Professor Emeritus of International Economics at the University of Copenhagen, he also worked for the Danish government, Harvard’s Development Advisory Service (in Malaysia), and the OECD in Paris. Former adviser to the Governor of Denmark's national bank, Chair of the Danish Economic Council and member of various expert groups on European monetary and financial integration - the subject area of most of his research and publications.

    Mr Thygesen was an independent member of the Delors Committee which prepared the outline of Economic and Monetary Union in Europe in 1988-9, a member of the committee advising the government of Sweden on an exit from the crisis of the early 1990s, a member of the Group of Independent Experts evaluating IMF surveillance following the Asian crisis, and he chaired the Economic and Development Review Committee of the OECD which evaluates the economic performance and policies of member states 2000-8. He is a Founder Member of the European Shadow Financial Regulatory Committee. He studied at the Universities of Copenhagen, where he obtained a PhD, and Harvard.

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