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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...
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