With the European Union’s pandemic recovery fund set to end in 2026, there is an urgent need for more durable financial mechanisms to support its long-term objectives. Fortunately, a new investment fund could both enhance the EU’s growth potential and ensure compliance with its new fiscal rules and shared values.
AMSTERDAM – Following weeks of intense negotiations, the European Union has agreed to revise its fiscal rules. The new rulebook will replace the Stability and Growth Pact (SGP) – which has been suspended since the start of the COVID-19 pandemic – and modernize the bloc’s 25-year-old fiscal framework.
While the SGP featured a one-size-fits-all model that ultimately undermined its credibility, the updated fiscal rules allow for a differentiated approach. The goal is to maintain the existing deficit and public debt limits while still encouraging member states to invest in green and digital technologies. Member states will be granted extended adjustment periods of up to seven years to reduce their debts to sustainable levels, provided they commit to reforms and investments that support this double (green/digital) transition.
But while the EU’s efforts to strike a balance between fiscal discipline and growth incentives are commendable, national budgets alone will not be enough to finance the EU’s ambitious double transition. The European Commission estimates that an annual investment of roughly €650 billion ($700 billion) is needed to meet the 2030 targets of producing at least 42.5% of the bloc’s energy from renewable sources and reducing greenhouse-gas emissions by 55%.
Under the new fiscal rules, funding for digital and green investments can be sourced from the €800 billion NextGenerationEU fund, which was established in 2020 to help European economies recover from the COVID-19 shock. But since the NGEU is scheduled to end in 2026, there is an urgent need for more durable financial mechanisms to support the EU’s long-term objectives.
As matters stand, the NGEU’s focus on national investments has left transnational projects such as high-speed railways and hydrogen infrastructure severely underfunded. Moreover, the US Inflation Reduction Act has widened the investment gap between Europe and the United States. To restore its strategic autonomy, European leaders should build on the success of the NGEU.
In a forthcoming paper, we propose the establishment of a $750 billion EU public-goods fund aimed at bridging funding gaps in crucial areas like renewable energy and digital infrastructure. The primary focus of this fund would be to catalyze cross-border investments and support projects that struggle to secure funding without EU-level financial support. By making access to this fund contingent on compliance with the new fiscal rules, the EU could maintain fiscal discipline among member states.
The public-goods fund, which would cover the 2026-30 period, is intended to align seamlessly with the EU’s climate goals. Building on the successful precedents established by previous EU borrowing initiatives, it would be financed by issuing EU bonds, backed by pooled national guarantees, the EU’s budget (bolstered by sufficient revenue streams), or both. Its proposed size represents roughly one-fifth of the bloc’s total investment needs through 2030, and the remaining investments would be financed through contributions from member states and the private sector.
By focusing on cross-border investments, the fund would underscore the EU’s unified approach to tackling European challenges. At the same time, the requirement to comply with the new fiscal rules would broaden the conditional framework established by the NGEU program, which linked fund access to the rule of law in recipient countries.
Similarly, the proposed conditionality regime would tie access to the new fund to domestic fiscal discipline, thus aligning with the EU’s revised fiscal guidelines. Rather than facing penalties for non-compliance, as was the case under the previous SGP, countries would be incentivized to demonstrate fiscal responsibility.
Thus, the conditionality regime would simultaneously boost the EU’s growth potential, uphold the integrity of the new fiscal rulebook, and encourage fiscal sustainability among member states. Moreover, increased debt issuance at the European level could be offset by reduced debt issuance at the national level.
Once the fund is established, countries would be encouraged to submit comprehensive investment proposals for transnational projects. The European Investment Bank would determine whether they are eligible to access the fund’s resources based on their alignment with the EU’s double-transition targets and the potential for positive cross-border spillovers. Meanwhile, the European Commission would ascertain that the countries proposing these projects comply with fiscal rules.
The fund’s proposed design aligns with the trend of using EU funds to achieve broader policy objectives. By relying on the successful model of the pandemic recovery fund and the bloc’s current conditionality regime, it would empower the EU to meet crucial climate targets while upholding its shared values.
About the authors:
Age Bakker is a former executive director of the International Monetary Fund and a former director at De Nederlandsche Bank (DNB).
Roel Beetsma is a professor of Macroeconomics at the University of Amsterdam and a member of the European Fiscal Board.
Marco Buti is Tommaso Padoa Schioppa Chair at the European University Institute’s Robert Schuman Center and an external fellow at Bruegel.