To finance its future, Europe needs a bigger, more targeted budget

There is widespread political agreement that the European Union needs far more investment by both the public and private sectors. At EU level, the challenge was crystallised in the often-referenced 2024 report on competitiveness by former Italian prime minister Mario Draghi, who highlighted that the EU risks falling behind global competitors unless investment increases sharply. The green transition alone requires hundreds of billions of euros each year; similar gaps exist in digital technologies and innovation, defence and resilience.

Some of the required public investment should be delivered through the EU budget. This should happen when EU-level spending is more efficient than investment spending by individual countries, and when national measures create spillover effects, positive or negative, for other EU countries. However, the EU budget is too small in the face of the investment challenge.

For the 2028-2034 EU budget, negotiations are ongoing. The European Commission proposed the budget in mid-2025. EU governments and the European Parliament must now negotiate to finalise it. They should ask the crucial question: can the proposed EU budget meaningfully close Europe’s investment gap?

Our research suggests that the answer, for now, is no.

We assessed what the 2028-2034 budget as proposed by the Commission can achieve. First, we identified which parts of the investment gap should be financed at EU level, that is, what economists call European public goods (EPGs): areas for which action at EU level is more effective than purely national efforts. These could include investments in cross-border energy networks, research and climate action.

Second, we examined the contribution the EU budget currently makes to investment priorities and by how much the next budget could contribute additionally to closing the investment gap.

Third, we built scenarios for how the 2028-2034 budget could be deployed, taking into account the considerable flexibility that would be given to EU countries to determine how they allocate funds and how effective the budget’s financial instruments might be in catalysing private investment. We looked at three possibilities: that countries largely continue current spending patterns, that they prioritise EPGs and that they aim to boost overall investment as much as possible, including by galvanising private investment.

The results indicate a major shortfall. Even under the most optimistic assumptions, the proposed EU budget would cover only a fraction of Europe’s investment needs. In relation to EPGs, the most relevant benchmark for EU-level action, the budget could close 12% to 22% of the investment gap. In other words, even in the best-case scenario, nearly four-fifths of the EPG investment needs would remain unmet.

When looking at total investment needs, including private investment, the EU budget plays a smaller role by design. Instruments such as loan guarantees can help crowd-in private investment, but their overall impact is limited. Taken together, the entire 2028-2034 EU budget might only help cover 4% to 8% of total investment needs.

There are both scale and composition reasons for the modest impact. The EU budget amounts to just over 1% of EU gross national income – very small compared to what countries spend nationally. Much of the budget continues to be devoted to traditional policies, such as agriculture and regional redistribution. These remain politically important but leave less room for forward-looking investment in innovation, climate and digitalisation.

In response, first and most obviously, budget negotiators should accept that the EU budget needs to be larger. An increase of around 0.6% of GNI compared to the Commission’s proposal would make a meaningful dent in the EPG investment gap. Unfortunately, current negotiating positions suggest a lower budget compared to the Commission’s proposal.

Second, the flexibility in the new system must be used wisely. The proposed budget would give EU governments considerable freedom in how they spend EU money. Countries should prioritise investments that support Europe’s long-term goals, rather than simply preserving existing spending patterns.

Third, policymakers should be realistic about financial engineering. Guarantee-based instruments and public-private partnerships can help, but cannot replace direct public investment. In particular, research, climate mitigation and cross-border infrastructure will require sustained public funding.

Finally, better data and analysis are needed, especially on defence spending. While political attention paid to defence investment has ratcheted up, there is still little clarity about the budgetary need in this area at EU level, particularly for joint industrial capacity and research. Without this, it is difficult to design effective spending strategies.

The proposed next EU budget does not yet match the scale of the task, and the risk is it will be watered down. For Europe to close the gap with the United States and China, and to deliver on its climate and digital goals, it will need both more ambition and more resources at EU level.