We need the EU to finance the transformation

by Dominika Biegon & Cédric Koch

The climate crisis and the socio-ecological transformation pose enormous challenges for Germany, which it cannot manage on its own. The transformation can be managed better and more efficiently with European coordination than if nation states attempt to go it alone. Nevertheless, national perspectives tend to dominate when concrete policies are made, especially when it comes to financing. In the last EU legislature, the problem of massive investment gaps plaguing the socio-ecological transformation was therefore left unresolved until after the European elections.

In a new background paper "An EU Future Fund for sustainable competitiveness and social cohesion: why and how?" written with co-authors from the Progressive EU Fiscal Policy Network of the FES and DGB, we call for the creation of an EU Future Fund to finance the transformation and develop concrete proposals for its key building blocks. In order to make the best possible use of the EU in financing the transformation Germany should be proactive and drive the design and implementation of a European solution, not least to ensure its own economic future in geoeconomic competition with the United States and China and to counterpose a convincing answer to right-wing-populist opposition to the transformation.

There are enormous needs for more investment in the EU’s transformation

The funding of investments to secure the future in the EU is a massive unresolved problem. Our research estimates that additional investments amounting to 2 to 6 per cent of EU economic output per year are necessary to achieve climate neutrality by 2050. Private investments will drive the bulk of the transformation, but the public, too, must play a key role, not least because public investments and grants may help to foster favourable framework conditions for companies.

Based on existing studies we estimate the additional public investments needed to be at least 1 percent of EU economic output per year. That corresponds roughly to the whole current seven-year EU budget. But this covers only investments for the decarbonisation of the European economies: It does not take into account important investments such as into resilience to safeguard European production in critical and future-oriented areas, in further training and qualifications, as well as in environmental protection and climate adaptation (see Figure 1 below).

EU austerity policy cannot meet these challenges

The new EU fiscal rules that recently came into force, however, obstruct – like the German debt brake – an expansion of public investments. Unfortunately, the EU institutions were unable to reach agreement on a truly sustainable reform. Instead, from 2025 many Member States will have to impose substantial budget cuts without significant exemptions for public investments.

On top of that, existing EU funding for the transformation in the coming years is set to expire. These funding instruments currently make an important (if not sufficient) contribution to financing the transformation. From 2027, however, almost half the EU financing framework for the transformation will dry out without replacement.

At least from then onwards we therefore urgently need an EU Future Fund in order to close the existing funding gaps. If part of the investment gaps could be dealt with by the EU, this would also directly benefit the German federal budget. In any case, it would help the German economy if a targeted investment agenda reinforced the competitiveness, resilience and future viability of the single market, an essential backbone for Germany.

We need a European investment campaign for a successful socio-ecological transformation of the economy

The proposed EU Future Fund is intended to support strategic investments with European added value in the Member States, especially in infrastructure, completion of the Energy Union, strengthening European industrial locations and social investments. Its instruments should boost private and public investments and include public equity stakes. The disbursement of public money should be transparent and targeted, but also linked to collective bargaining coverage, as well as location and employment guarantees. In that way the financing of the transformation will be systematically oriented towards the creation and preservation of decent jobs.

New EU resources are key to funding on the necessary scale, both to shield scarce national contributions and to enable additional investments through new EU bonds. Several legal paths are plausible, but all require unanimous and ratified reform of the Own Resources Decision. Controversy over this will shape the next EU legislative period, but it offers progressives an opportunity to forge a broad societal alliance at the national and European level and can achieve majority support.

Economic uncertainties and an unsocial austerity policy are two of the main reasons for the rise of populist and extreme parties. An EU Future Fund that creates positive prospects for the future, and mitigates social and economic hardships would therefore also strengthen social cohesion and democracy in Europe.

The DGB's executive board recently adopted a position paper entitled "Ein EU-Zukunftsfonds für nachhaltige Wettbewerbsfähigkeit und gesellschaftlichen Zusammenhalt".

Dr Dominika Biegon is Head of Division for European and International Economic Policy at the the German Trade Union Confederation (DGB).

Dr Cédric Koch is policy advisor for European and International Economic Policy at the Friedrich-Ebert-Stiftung (FES).