site.btaIMF: Next EU Multiannual Financial Framework Should Double Investments in Defence, Clean Energy, and Innovation

The EU single market is a powerful economic instrument, but it has not yet reached its full potential, said International Monetary Fund (IMF) experts Jiae Yoo and Alexandra Fotiou during the IMF and World Bank Annual Meetings, which opened in Washington on Tuesday. To achieve this, strong policy coordination and targeted investments aimed at deepening its integration are necessary, and they must be supported by a robust budget, they added.

According to IMF analyses, the growth of companies in Europe and their ability to fully benefit from the potential of the single market are hindered by various national regulations and legal systems, limited access to financing, bureaucratic obstacles to hiring workers from other EU countries, and high and unpredictable energy prices.

To overcome these barriers, four key areas of reform can be outlined—not only at the pan-European level but also nationally, Yoo and Fotiou noted.

First, they recommend the development of a unified legal framework that builds upon and harmonizes national laws to facilitate company expansion. It is also crucial to improve access to financing by promoting venture capital participation and easing investor-focused regulations, while reducing reliance on bank financing, which often does not serve small, innovative companies well.

A more favorable business environment can also be fostered by increasing labor mobility—through, for example, the digitalization of the recognition of professional qualifications and facilitating the transfer of social and labor rights between member states.

At the same time, enhancing energy security and lowering energy costs could be achieved through investments in energy infrastructure and renewables, as well as the expansion of cross-border electricity transmission networks.

According to the IMF experts, these reforms could increase EU’s GDP by at least 3% over the next decade, compared to the currently projected growth of around 1%. However, analytical models suggest that the benefits are likely to vary across different member states.

To achieve these goals, the EU’s multiannual budget, set out in the Multiannual Financial Framework (MFF), is a fundamental tool for supporting and coordinating national reforms and investments, as well as ensuring the funding of public goods.

IMF experts recommend that the next MFF, which should cover the period from 2028 to 2034, double investments in pan-European public goods such as defence, clean energy, and innovation—from the current 0.4% to 0.9% of the EU’s GDP. This would require a significant increase in the overall budget, unless existing programs are cut. However, even such a substantial increase would not fully cover Europe’s total investment needs, with the remainder expected to come from other sources, including the private sector, according to the IMF analysis.

For maximum efficiency of EU support, the experts also recommend that funding be linked to outcomes rather than based on eligibility criteria. Additionally, they suggest modernizing the EU-wide financing strategy, for example, by making joint debt issuance a regular financing tool, or by identifying new sources of revenue, such as proceeds from carbon emissions trading or potential fees for the use of cross-border infrastructure.