The key question for Europe’s next budget: Can it deliver strategic investment power?

To remain prosperous, free and secure, the EU must learn to act as a strategic investment power, like its principal competitors, the United States and China. Yet while Brussels has set ambitious targets from climate to defence, it still lacks the financial firepower to achieve them. Mario Draghi has estimated an €800 billion annual investment gap in sectors such as defence, innovation and competitive decarbonisation. Leveraging EU funding to help close this gap, while preserving territorial cohesion, must be the defining task of the next Multiannual Financial Framework (MFF).

As EU leaders debate the Commission’s €2 trillion budget proposal, four questions will determine whether the new MFF can be a genuine game changer: focus, size, concentration and leverage.

Focus on European public goods

With the EU budget accounting for just a tiny fraction of the Union’s GNI – the current budget accounts for about 1% while the Commission’s proposal would amount to around 1.26% – spending must be selective. The greatest impact lies in European public goods – policy areas where cross-border spillovers and economies of scale are strongest. These include the scale-up of breakthrough innovation, trans-European energy, digital and transport infrastructure, defence and space, health and skills development.

The Commission’s pitch for a large Competitiveness Fund, centred on clean tech, digital leadership, biotech and defence/space, points in the right direction. The MFF proposal also seeks to steer the Common Agricultural Policy (CAP) and Cohesion Funds more closely towards EU-wide priorities through national plans.

But this approach divides member states. Larger, richer countries – whose ecosystems are well placed to benefit – tend to support it. Smaller and less affluent states, many of them major recipients of CAP and Cohesion money, fear losing resources and control. Another risk is political capture: governments may channel support to incumbent industries rather than to high-risk, high-reward projects. This has been a recurrent problem in the EU’s innovation scale-up tools, such as the European Innovation Council (EIC).

Ultimately, projects under the Competitiveness Fund should be selected for technological excellence and EU-wide impact, not for geographical balance. Well-developed member states generally defend this merit-based logic, while less developed countries press for territorial quotas.

Sufficient size to de-risk projects that count

Even with sharper focus, the MFF will make a real difference only if it has sufficient financial firepower. The EU budget must be big enough both to support a broad portfolio of projects and to provide adequate depth in financial support to de-risk innovation and attract private investment.

Existing programmes such as InvestEU and the EIC have often failed to support breakthrough projects because of limited de-risking power and a lack of sufficient equity financing. The Commission’s proposal – creating a EUR 451 billion Competitiveness Fund, and doubling Horizon to €140 billion – could alleviate this problem. President von der Leyen’s call for a Scale-Up Europe Fund would add another essential element: an equity-based tool to pool public and private money essential for scaling future-oriented companies and assets.

Altogether, however, increasing the budget by 20% in real terms to €2 trillion will likely be insufficient, given that NextGenerationEU runs out in 2028 and its repayment will likely absorb up to 20% of the current budget’s value annually. Moreover, member state backing is uncertain. The German government, for instance, has so far declared the proposed budget impossible to sell to its constituency.

More effective spending through streamlining

To get more out of limited resources, the Commission proposes streamlining: bundling dozens of existing instruments into the Competitiveness Fund and requiring each member state to submit a single national plan, merging CAP and Cohesion programs into a unified framework.

In theory, this would reduce red tape and better align spending with European priorities. In practice, it is highly contentious. Many northern states welcome simplification, while major CAP and Cohesion beneficiaries fear losing control over funding streams.

Increasing leverage

No EU budget will ever be enough on its own. The MFF must serve as a catalyst to crowd in additional investment and expertise. The Commission’s proposal to run the Competitiveness Fund on an open architecture model – allowing multiple implementing partners such as the European Investment Bank (EIB) Group, national promotional banks (NPBIs) and international financial institutions (IFIs) – should be followed through. The broader use of blended finance across the MFF, including cohesion policy, would further stretch scarce resources.

Yet here too controversy looms. Smaller and Cohesion countries worry that open architecture and blending will favour big players like the EIB or France’s and Germany’s promotional banks, leaving weaker national ecosystems behind. They also fear a geographical bias towards richer states.

Beyond current proposals, the EU could go further. A dedicated securitisation platform could bundle EU budget-backed projects into high-quality tradable assets, expanding the supply of ‘safe’ European securities. Coupled with a Savings and Investment Union, this would help to unlock the vast pools of institutional and retail capital still underutilised for EU strategic goals.

The risk of dilution

Most of these ideas – focus on public goods, greater firepower, streamlined programmes, and increasing leverage – are controversial across member states. The danger is that compromises will water down the Commission’s ambitious proposal.

But Europe faces exceptional challenges. To meet them, the next MFF must be larger, more targeted and more leveraged, with a stronger emphasis on European public goods. Only then can the EU keep up with its global competitors and secure its prosperity, freedom and security.

This work originally appeared in the Trans-European Policy Studies Association (TEPSA)’s European Council Experts’ Debrief, Issue XVI, Towards the next MFF: Can the EU deliver?. Read more here.

Philipp Lausberg is a Senior Policy Analyst in the European Political Economy Programme at the European Policy Centre.

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