The EU unveils its €2T budget plan for 2028–2034, kicking off tough talks that will shape Europe’s priorities for the next seven years. The following is an economic take on the possible outcome of negotiations and the process itself.

On July 16, the European Commission presented its proposal for the Multiannual Financial Framework (MFF) 2028–2034, marking the start of a process expected to take around two years before the MFF enters into force on January 1, 2028.

The annual EU budget is relatively small—just over 1% of the EU’s GNI—while national budgets in member states can exceed 50% of their GDP. Nevertheless, the amounts involved are astronomical. The Commission’s proposal amounts to nearly €2 trillion in current prices over the seven years of the MFF.

Negotiations over the new MFF promise to be a major undertaking, not least due to the large number of stakeholders involved and the many contentious issues that need to be addressed.

This paper aims to clarify this complex process and shed light on possible outcomes of the negotiations.

The Commission’s Proposal

First, it must be said that the Commission’s transparency regarding the Proposal leaves to be desired. The information is spread across various sources: direct communication via press releases and its own websites, the proposed Council Regulation laying down the MFF for the years 2028 to 2034, the proposed Council Decision on the system of own resources, the Commission’s communication to other European institutions, and supporting staff documents. One must sift through all this documentation to form a somewhat coherent picture of the Commission’s plans—and even then, clarity is limited.

According to the Commission’s own communication, the proposal amounts to just under €2 trillion, or 1.26% of EU GNI. The proposal primarily reflects the funding need for several new priorities such as defense and competitiveness, as well as for ongoing challenges like climate, migration and Ukraine. The Commission wants to structure spending differently than is currently the case by reducing the present seven spending categories (“headings”) to four.

The first heading, with the unwieldy title “Economic, social and territorial cohesion, agriculture, rural and maritime prosperity and security”, is the largest in terms of funding, accounting for €1.062 trillion in current prices. This heading bundles the two traditionally largest spending items—agriculture and cohesion. More importantly, the Commission wants to change how this money is spent by giving more responsibility to member states. Each member state is expected to submit a National and Regional Partnership Plan (NRPP). These NRPPs will serve as the channels through which EU funds for cohesion (ERDF, CF, ESF), agriculture (CAP, fisheries) and migration will flow to the member states. The aim is to align both EU priorities and the specific needs of member states and their regions. The inspiration for this approach comes from Next Generation EU (NGEU).

This heading also includes €168 billion in repayments the EU must make on loans taken out to finance NGEU.

The second heading has a slightly shorter name: “Competitiveness, prosperity and security”. It accounts for €590 billion and aims to implement recommendations from the Draghi Report. The centerpiece here is the European Competitiveness Fund (€450 billion), a consolidation of existing budget lines including the Horizon Europe research program and various subsidies and loans for clean transition and decarbonization, digital leadership, health, biotech, agriculture and the bioeconomy. This heading also includes €130 billion earmarked for building European defense capabilities.

The EU’s external orientation is reflected in the third heading, “Global Europe”, which totals €215 billion spread across various regions where the EU seeks to exert influence. A special status is reserved for the Ukrainian Reserve, the successor to the Ukraine Facility. The €100 billion allocated for this is kept “over and above the MFF ceilings.”

The final heading concerns Administration, totaling €118 billion, which includes provisions for increasing staff by 2,500 jobs.

Special attention in the Commission’s proposal is given to flexibility, to better respond to unexpected events and crises. This is to be achieved by reducing the number of programs from 52 to 16 and bundling various funding sources within the NRPPs. A larger share of unprogrammed funds is also foreseen. The MFF 2028–2034 proposal consolidates and generalizes the NGEU approach, linking funding to results-based milestones and reforms agreed upon in the NRPPs. Through financial instruments including loans, equity, and guarantees—and an open architecture involving the EIB, EBRD and national development banks—the EU aims to create leverage on its funds.

The Commission also introduces conditionality in its MFF proposal, tying funding to respect for the rule of law and the Charter of Fundamental Rights.

One enigmatic component of the plans is the proposed “new dedicated crisis mechanism”. Information about this is scattered across various EU sources. The Commission’s website mentions nearly €400 billion in loans to member states intended to address crisis needs. Another piece of information appears in the Communication from the Commission (COM 2025, 570 final/2), where a line in the final expenditure table under “over and above the ceilings” refers to a “crisis mechanism” amounting to “0.25% of GNI” and “€395 billion.” A third reference is found in the Commission’s proposal for a new Own Resources Decision, which includes provisions for borrowing on capital markets during crises and lending the proceeds to member states.

Strictly speaking, the MFF is limited to EU expenditures. The issue of financing and own resources is also addressed through the Own Resources Decision proposal. Its main aim is to revive the long-standing debate on own resources, which has been dormant in recent years. The usual suspects are revisited: a fraction of ETS 1 revenues, proceeds from the Carbon Border Adjustment Mechanism and a tax on large corporations—now in the form of the Corporate Resource for Europe (CORE). New ideas include taxes on uncollected e-waste (waste of electrical and electronic equipment) and tobacco (TEDOR).

Size Matters

Whether the budget will increase is already a point of debate in itself. The Commission’s communicated increase of 0.25 percentage points of the EU budget in terms of the EU GNI should be taken with a grain of salt. A comparison made by the European Parliamentary Research Service between the current and future MFF provides useful insight. The EP uses 2025 prices, which reduces the Commission’s projected €2 trillion in current prices to €1.763 trillion. When this amount is compared to EU GNI, it results in 1.256%.

However, this figure includes the repayment of NGEU loans—specifically €149.3 billion or 0.11% of EU GNI. Since this amount cannot be used for policy purposes, it should be excluded from the comparison. The new MFF then amounts to 1.15%. This should be compared to the 1.02% in the current MFF, also in 2025 prices and excluding NGEU spending. In fact, expenditures in the current MFF, including NGEU spending, reached 1.7% of EU GNI.

Another note on the 1.02% figure: initially, 1.13% was foreseen. However, the deflator used to adjust budget amounts for inflation was 2%, which turned out to be lower than actual inflation, resulting in a 2025 figure of 1.02%. Depending on the baseline used, the increase is either 0.02 percentage points (compared to 1.13%) or 0.13 percentage points (compared to 1.02%).

This modest budget increase proposal is obviously seen by some as too little and, less obviously, by others as too much. This tension reflects the gap between what is needed and what is feasible. The need is highlighted, among other things, in the Draghi Report on European competitiveness (2024), which identified an annual investment requirement of €750–800 billion to make the EU competitive again. Of that, one-fourth to one-third should come from public funds. However, Draghi does not specify how much of that should come from the EU budget.

Bouabdallah et al. (2024) estimate an additional 0.3–0.4% of EU GNI is needed, while Felbermayr & Pekanov (2024) suggest as much as 3.0% extra. Darvas et al. (2025) estimate the additional resources required to meet challenges in defense, digital transition, climate, energy systems, transport, and NGEU repayments at 0.9% of EU GNI.

On the other side of the equation is how far member states are willing to go. As is well known, they are far from united. The “frugals” (Germany, Netherlands, Sweden, Denmark, Austria, Finland) will only tolerate a modest increase in the relative EU budget, arguing that they already contribute enough as net payers. Countries like France (also a net payer), Southern and Eastern European member states and the Baltic states want additional funding for new tasks such as defense, without having to cannibalize traditional spending areas like agriculture and cohesion, from which some of them benefit highly.

It Is All About the Composition

The final size of the budget cannot be separated from the priorities that are set. If funding is needed for areas such as defense, migration and boosting competitiveness, and if the overall budget is not allowed to increase significantly, then this inevitably means cuts must be made elsewhere or new sources of revenue must be found (see below for the latter).

Cutting existing expenditures would primarily affect the largest spending categories, namely agricultural and cohesion funds. The choice to cut there is defensible. Agricultural spending and a significant share of cohesion funds do not constitute European public goods, but rather transfers that could just as well take place at the national and subnational level (Darvas et al. (2025)). A fundamental shift towards more spending on common priorities away from pure subsidising must be seen as a significant step forward (Hansum et al. 2025).

The Commission is already anticipating this by proposing a 20% reduction in total agricultural spending in the upcoming MFF, bringing it down to €300 billion. In August, the Commission revealed part of its plan to cap the amount of subsidies a farmer can receive. Currently, 20% of EU farms receive 80% of direct income support. The proposed cap would be €100,000 in area-based income support per farmer. Below this cap, a reduction of 25% would apply to amounts between €20,000 and €50,000, and a 50% reduction for amounts between €50,000 and €70,000. This proposal would primarily affect large farms in Slovakia and the Czech Republic, but also in France and Germany, where respectively 75% and 70% of farms would receive less funding.

Cohesion funds are also set to decrease in size. According to the EP’s research service, they will drop by 11% (in 2025 prices) to €405 billion.

Adaptability, Simplicity & Sustainable Performance – Features that Make a Good House?

These objectives are to be pursued, among other things, through the NRPPs. It remains unclear how this will affect the balance of power between the Commission, member states and regions. Regions fear they will be left behind, as the European and national levels are strengthened through the NRPPs, making it harder for regions to push through their own priorities (cf. Eurada (2025) and Filiberti (2025)). Regions also worry that the performance orientation will fail to adequately account for regional differences. The current 5,000 heterogeneous and non-aggregable indicators would be reduced to around 900, none of which can be applied at the regional level Eurada (2025).

Even for member states, performance-based payments may be difficult to accept, despite their own increased role in the NRPPs. Such payments run counter to the long-standing “juste retour” logic. The Commission wants a larger share of unprogrammed amounts in the new MFF. This means member states are not immediately guaranteed that these unprogrammed amounts will be allocated to them. This negative impact on the “juste retour” principle is further amplified by the increased emphasis on results-based funding. In other words, if results cannot be sufficiently demonstrated, member states lose revenue, and their “juste retour” is negatively affected. This prospect is unlikely to make member states enthusiastic about the Commission’s proposal during the upcoming MFF debate.

Locks and Keys – Conditionality & Governance

Conditionality related to the required results is not the only type of conditionality the Commission wants to include in the MFF. Member states may lose access to funds from, among others, the NRPPs, if they fail to uphold the rule of law or fundamental rights. The Commission draws inspiration from the experience with NGEU, where payments could be blocked in cases of systemic deficiencies linked to the rule of law.

These intentions are clearly aimed at countries such as Hungary, Slovakia, and Poland under its previous government. Since unanimity is required to approve the MFF, the targeted countries would have to help approve this proposal as part of the MFF. This makes it a particularly difficult, if not impossible, issue to resolve during the upcoming negotiations.

A Vision of Caretaking – New Own Resources

In its communication, the European Commission has skillfully focused attention on the (potentially new) fiscal sources that would need to be tapped to realize the ambitions on the spending side.

However, several other aspects of the draft Own Resources Decision remain underexposed. One key element is the reduction in collection costs from 25% to 10%. This means that member states will be allowed to retain 15% less of the funds they collect on behalf of the EU to cover their collection expenses. In absolute terms, this amounts to €13.3 billion per year in 2025 prices. This figure represents a quarter of the revenue expected from the new own resources—just slightly less than, for example, the projected revenue from the EU tax on e-waste.

A second element is the increase in the own resources ceiling from 1.4% of EU GNI to 1.75%. It should be noted that this ceiling had already been temporarily raised to 2% due to the RRF/NGEU.

A third element is that the Commission proposes allowing borrowing on capital markets during times of crisis, with the proceeds to be lent to member states (cf. supra). To enable this, the ceilings for payments and commitments would also need to be temporarily increased by 0.25 percentage points over the MFF period.

Conclusions

Although not much additional funding is allocated to the EU level—despite widespread recognition of its necessity—the internal dynamics of the MFF proposal are well-structured. The internal shifts move toward financing EU public goods and away from subsidy systems that could just as well be managed at lower levels of government.

The definition of these EU public goods includes encouraging new orientations regarding EU defense, EU migration policy and EU-wide investments aimed at strengthening competitiveness.

The question remains however how the Commission proposal will stand firm against the interests of the member states.  The ‘Frugals’ (Germany, the Netherlands, Sweden, Denmark, Austria, and Finland) seek to cap the overall size of the EU budget at around 1% of GNI. Their preference is to shift the focus from direct grants towards reform-oriented and performance-based spending. They remain wary of introducing EU-level taxes, guard the prerogatives of the Council in budgetary decision-making and advocate a strong link between funding and respect for the rule of law.

In contrast, a Southern and Eastern coalition (including Italy, Spain, Greece, Portugal, Poland, Romania, Bulgaria, Hungary, Croatia, and others) places emphasis on safeguarding cohesion policy and the agricultural spending. For these member states, the financing of new EU priorities should come from additional resources rather than through a reallocation that undermines traditional budget headings. They also call for greater flexibility in the implementation of the NRPP’s.

France occupies a somewhat distinct position. It continues to champion agricultural interests and advocates for stronger EU competences in defense and industrial policy. Paris is open to a larger MFF envelope, but only insofar as it is tied to goals of competitiveness, strategic autonomy and European sovereignty.

The Baltic and other frontline states place priority on security and support for Ukraine. They argue for an increased overall budget ceiling and for faster deployment of resources in order to respond to geopolitical threats.

Besides the conflicting positions of the member states there are also the distinct interests of the other EU institutions which introduce their own dynamics in the budgetary debate. The European Parliament traditionally pushes for a more expansive budget. In political debates, it has called for an envelope of up to 2% of EU GDP, the development of genuine own resources, greater flexibility for re-programming funds, and strict enforcement of rule-of-law conditionality. The Council, by contrast, remains divided along the classic lines between net contributors and net beneficiaries. Finance ministries, in particular, tend to be sceptical about EU-level taxation and resist commitments that could lead to open-ended liabilities for national budgets.

---

Frank Naert holds a PhD in economics from Ghent University. He is emeritus professor at Ghent University having lectured on public finance, European economic integration and competition policy and having written extensively on European economic affairs. He also was advisor on European affairs to the Belgian federal minister of economic affairs.