Making the MFF Fit for Purpose

Source: IMF – News in Russian

Opening Remarks by Alfred Kammer, IMF European Department Director, for the Annual EU Budget Conference

May 20, 2025

Thank you for the opportunity to join this important discussion today on the EU budget.

Europe stands at a transformative crossroads. The global environment is increasingly complex, and structural changes are reshaping the foundations of European economies. The challenges before us are significant: strengthening productivity and resilience amid demographic aging and rising geopolitical and trade tensions while increasing defense spending in a fiscally sustainable way, and enhancing energy security and accelerating the clean energy transition.

This is an extraordinary combination of challenges, and it will take an extraordinary effort to meet them. The key is to combine (i) a determined push to complete the single market with (ii) national reforms to allow Europe’s firms to grow to scale. The benefits of doing both promise to be much larger than EU-level and national efforts could achieve on their own. For example, dropping “red tape” that holds back firms at the national level will have a significant larger effect on investment when supported by a much deeper and fully integrated European capital market. And (iii) we will need the EU budget to amplify these efforts by enabling the joint provision of European public goods and incentivizing national reforms. Just think of the importance of energy security for the single market—this is just one example of a European public good where the EU budget has an important role to play.

The Multiannual Financial Framework, or MFF, has proven its strategic importance time and again. It has supported economic convergence through cohesion policy, and, more recently, the ambitious NextGenerationEU package launched in 2020 helped Europe recover from the pandemic with renewed resilience.

Yet, once again, the scale and nature of the challenges ahead require a fundamental rethink. To remain fit for purpose, the upcoming MFF must undergo a comprehensive overhaul. Our recommendations focus on three critical areas.

First, a more ambitious budget with a stronger focus on European public goods is needed.

Over time, the MFF has evolved to reflect emerging needs, but it has not kept pace with the expanding list of challenges that demand a joint EU-level response. Its current size and structure are insufficient to meet the scale of new investments required.

The budget must prioritize areas where EU action can deliver the greatest value—by generating positive spillovers, leveraging economies of scale, and also avoiding duplication between member states. These are the hallmarks of European public goods. Investments in energy security, defense capabilities, and research and innovation are clear examples where joint EU action is both necessary and efficient.

To meet these needs, we must consider a significant increase in expenditures targeted at European public goods, from 0.4 percent of GNI currently to at least 0.9 percent, based on various estimates from the Commission and others. Doing so without reducing allocations to existing programs would imply increasing the MFF budget by at least 50 percent for the 2028–2034 period, from 1.1 percent of GNI to 1.7 percent of GNI.

In the first instance, more EU spending on public goods would reduce the burden on national budgets for the provision of these public goods. But, importantly, this would not simply shift costs from the national to the EU level. With coordinated EU-level investment, greater efficiency will be achieved and, thus, net savings in the provision of these public goods will be generated. For instance, in the case of investments for the clean energy transition, we estimate that improved coordination at the EU level could reduce aggregate costs by approximately 7 percent. At a time when many countries face tight fiscal constraints, such efficiency gains are critical.

Second, we must ensure the MFF is more performance-based, streamlined, and adaptable.

At the core of this effort should be a stronger focus on performance. Linking financial support more systematically to outcomes—an approach implemented through the Recovery and Resilience Facility—can significantly improve the effectiveness of EU spending. The performance-based approach should be expanded across more areas of the EU budget, particularly where targeted financial incentives can catalyze national and regional reforms that complement EU objectives. But as we expand this approach, we must also ensure it remains as simple and transparent as possible—complexity can hinder both implementation and accountability. Programs under cohesion policy and the Common Agricultural Policy are clear candidates. Importantly, though, effective implementation will also require leveraging local and regional expertise to tailor solutions to specific contexts.

Beyond performance, the design of the MFF must be modernized to reduce complexity and increase strategic focus. Consolidating the more than 50 budgetary programs into a smaller number of thematic clusters, organized around key policy priorities, would help streamline the budget. Moreover, harmonizing requirements across programs would reduce the administrative burden for governments, organizations, and beneficiaries, while improving accessibility and implementation.

The budget also needs to become more adaptable. The events of the past five years have demonstrated the need for greater flexibility to respond to evolving circumstances. Thus, the MFF should be equipped with a greater margin for reallocation within the budget and stronger flexibility instruments—backed by sufficient resources—to address more frequent and intense shocks. A mid-term review process within the regular budget cycle could continue to help respond to changing realities.

Third, the financing framework of the budget must be strengthened.

A more ambitious EU budget will require an enhanced financial capacity. Currently, the MFF is predominantly funded through national contributions based on GNI. To support a step-up in European public goods investment, the financing model should be expanded to include borrowing and more robust own resources.

Borrowing capacity—particularly during the initial investment scale-up—can enable the EU to achieve shared objectives without delay, while smoothing the fiscal impact for member states over time. Moreover, bond-financing can support the further development of a European safe asset, thereby advancing capital market integration and contributing to macro-financial stability.

At the same time, the long-term sustainability of the EU budget requires solid and predictable revenue sources. Progress on new own resources is essential—not only to finance existing debt obligations under NextGenerationEU, but also to underpin future borrowing. The Commission’s proposals, including revenue based on the Emissions Trading System, the Carbon Border Adjustment Mechanism, and potentially a harmonized corporate tax base under the “Business in Europe” initiative, represent a meaningful step forward.

In the longer term, additional revenue sources linked to European public goods—such as user fees on jointly funded infrastructure—may also play a role as the budget evolves toward supporting more EU-wide investments, even if the scope remains limited for now.

In conclusion, meeting Europe’s complex challenges requires a more impactful EU budget. The next MFF presents a unique opportunity to scale up ambition, deliver on shared priorities, and transform the budget into a true engine for growth, resilience, and European sovereignty.

This will not be an easy path. Increasing the budget, improving its design, and broadening its financing base will all require political consensus across member states. But the potential rewards are significant: a more united, more competitive, and more secure Europe.

Thank you.

https://www.imf.org/en/News/Articles/2025/05/20/sp052025-ak-making-the-mff-fit-for-purpose

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