European public goods are public goods which can be more effectively provided at the EU level than the national level. This column argues that the EU’s new multiannual financial framework should focus on the benefits of common spending on such public goods, because they exploit positive cross-border spillovers and offer economies-of-scale. They do not need to be redistributive across borders and have the potential to benefit all EU member states. They also do not need to come with an increase in the overall tax burden; in fact, this burden may fall due to efficiency gains.
Soon preparations will start for the EU’s multiannual financial framework (MFF). Despite gradually progressing integration, the EU budget has remained around 1% since the 1980s (Buti 2023). Even though the EU budget was supplemented by Next Generation EU (NGEU) for the period 2021-26 (approximately €800 billion, or 5.5% of EU GDP in 2021 for five years or ~1% annually), this pales in comparison to the US federal budget, which was around 22½% of GDP in 2023 or national public spending by EU member states of almost 50% of GDP in 2022. Of this total, 19½% of GDP went to social protection, which left around 30% of GDP for the remainder, including health, education, defence, and debt service. A large, though slowly declining, fraction of the already small EU budget has traditionally gone to the common agricultural policy and cohesion funds. In this column, we argue for the financing of public goods that benefit large parts or the entire EU, the so-called European Public Goods (EPGs), from the EU budget. It will create cost savings and make public good provision more effective for European citizens. The momentum is there, in particular for security and defence, prima facie European public goods, for which the need has become acute.
What are European public goods?
The general adage is that governments should only interfere with the provision of goods and services when there is a market failure. Otherwise, provision should be left to the private sector. There are instances when public provision is preferable to private provision. This would, for example, be the case when private provision would lead to under-provision, because not all benefits are fully internalised, or because the size of an investment is too large for a private firm to make. Examples are investments in railways, bridges, or roads. The broader benefits in terms of development of the area would be ignored by a private investor. Typically, the government would finance such infrastructure, paying private firms to do the construction. In the case of European public goods, the market failure has to be supplemented by a national public failure: the EU should intervene whenever private agents or national budgets fall short of financing goods that would benefit the EU as a whole.
With ongoing EU economic and political integration, the question has become relevant whether some public goods typically provided at the national level would be more efficiently provided at the level of the EU, especially as priorities are shifting over time. European public goods can be defined as “policies and initiatives whose value to the citizens are higher when conducted at EU rather than at national level” (Fuest and Pisani-Ferry 2019). The benefits of the provision of public goods at the EU level are larger economies-of-scale and stronger cross-border spill-overs of the good (leading to under-provision when this is left to the national level), while the benefits of provision at the national level are divergences in national preferences and better information at the national level, e.g. see Buti et al. (2023), Claeys and Steinbach (2024), and Wyplosz (2024). Examples of potential European public goods are cross-border infrastructure, external border protection, defence, 1 pandemic prevention, and health crisis management, and knowledge through research. Examples of European public goods currently provided at the EU level are Covid-19 vaccine procurement, Schengen and Horizon Europe. Another example is interconnecting Europe’s energy grids. When Russia attacked Ukraine, we were faced with under-connected EU grids. By interconnecting the wind power of the North Sea with the solar power of South East Europe, 2 this allows for energy efficiency, hitting climate goals, and reducing energy risk. These are better organised on a European level than at the national level. Obviously, the case for major European public goods should be examined area-by-area.
New European political priorities lend themselves more than ever to European public goods
The existing size and composition of the EU budget serve as a ‘status quo’ point that will be difficult to change, because of vested interests and a number of countries fear that their net contribution may increase even further, while this is not justified by the effect of the EU on their welfare. However, existing positions fail to do justice to the fact that a refocus towards and expansion of EU spending on European public goods would on net benefit each country in the EU.
The EU budget spending has moved over time: while in the 1970s 90% was spent on the Common Agricultural Policy, in 2022 it was down to less than 20%; in 2022 more than 50% was spent on EU Cohesion (Mourlon-Druol 2024). These spending allocations have been driven more by political arguments at the time than by economic arguments. Combining the current political responses to geopolitical and climate development needs with the economic benefits will push the debate around European public goods to the next level.
The new European Commission’s priorities have significantly shifted compared to decades ago and even evolved compared to five years ago. President von der Leyen announced the ambition of making the new College an ‘Investment Commission’ (Von der Leyen 2024). The focus for 2024-2029 is on the one side on “a strong and secure Europe: ensuring coherent and influential external action; strengthening EU security and defence, and protecting EU citizens; preparing for a bigger and stronger Union; pursuing a comprehensive approach to migration and border management” and on the other side on a “prosperous and competitive Europe: bolstering the EU’s competitiveness; making a success of the green and digital transitions; promoting an innovation- and business-friendly environment; advancing together.” These priorities have been developed further in the Competitiveness Compass (European Commission 2025). The first priority lends itself directly to European public goods. The second would need the right policy enablers to allow the private sector to foster in this space, and can use European public goods as enablers. The new European Priorities lend themselves more than ever to European public goods. If we want to remain the third largest economy in the world, we need to keep a big open single market of 27 countries. Defending and securing the outer borders and tackling the negative externalities of undesired migration are European interests and therefore European public goods. However, as pointed out by Zettelmeyer (2025), for the Competitiveness Compass to succeed, substantial central EU resources would be needed.
For the new European governance cycle (2024-2029), good candidate European public goods are (parts of) defence and security policy, external border control, energy transition infrastructure (renewable energy, railway infrastructure, roll out of electric public transport, and vehicle infrastructure, etc.), parts of R&D that need public sector support (like security intelligence), and EU stockpiling to prepare for pandemics and natural disasters (like floods and extreme weather events). The goods have a strong ‘network’ effect, i.e. the benefits enjoyed from them become stronger when they are rolled out in more countries, and/or they lead to savings when delivered at the EU level.
As for savings, for example during the Covid pandemic the common negotiation of vaccines and development led to lower pricing of the vaccines than in other parts of the world that needed to buy at higher market pricing. Common energy purchases would give bargaining power when negotiating with the major energy providers globally and the same is the case for purchases of armaments, where moreover unnecessary duplications must be avoided. Joint procurement initiatives by the Commission are becoming more prevalent indeed. It should also be noted that some goods cannot reasonably be provided purely at the national level. Think of high-speed railways across countries. In a geoeconomically fragmenting world, trade wars and tariffs will loom large in the coming years. As the third largest economy in the world, a stronger Europe will allow better negotiation power vis-à-vis the new US administration and China.
European public goods have broader macroeconomic benefits. The results from centrally funded R&D will become broadly available, benefitting firms throughout the EU. Investments in the energy transition infrastructure will stimulate demand (although against the background of tight labour markets) and innovation by firms involved in the transition. Rolling out the infrastructure at scale can make this activity an export product of the EU. Overall, we may expect European public goods to boost both longer-run potential output and shorter-run demand (Beetsma and Buti 2024).
What is holding back the financing of goods whose European public good character is obvious?
There are a number of reasons, often not grounded in economic logic, why European public goods come off the ground only slowly. First, there may be a fear that EU funding for European public goods is not used in an appropriate way. To counter this eventuality, conditionality can be applied of the type embedded in Next Generation EU. It should be emphasised, though, that the European public goods we envisage have a limited overlap with the NGEU projects, which are mostly small-scale with no cross-border effects and feature substantial transfers and redistribution. In addition, there is the rule of law conditionality regulation specifically aimed at protecting the financial interests of the EU. 3 Second, some countries might perceive to benefit less than others from the same European public good. For example, countries geographically more remote from Russia might see less need for an EU-level defence policy. Incentives, for example in terms of burden sharing, can be designed to get these countries to participate. Third, some countries, especially the wealthier ones, fear contributing relatively more to European public goods. However, the financing can be shaped such that each country enjoys a net benefit. Fourth, there is a fear that European public goods lead to larger overall public expenditures (national plus EU) and, therefore, a larger overall tax burden in the shorter or longer run, in case of (partial) debt financing. However, a shift in public goods provision from the national to the EU level should not lead to a larger overall tax burden nor to larger fiscal deficits. On the contrary, economies-of-scale should result in cost savings at a given level of public good provision, as is also argued by Draghi (2024), while efficiency gains can be reached over time by borrowing through existing European Safe Assets.
Financing European public goods
Mario Draghi’s report on competitiveness (Draghi 2024), points out that historically, around 80% of investment in Europe has been financed by the private sector and 20% by the public sector. For the €800 billion investments needed annually, it implies governments will need to spend more than €1 trillion over the next seven years. Should one be able to combine the (likely) unused funds from NGEU and funds from the European Stability Mechanism (ESM) and the European Investment Bank (EIB), these public resources would be available (see Anev Janse and Beetsma 2024). This would require, however, a repurposing of these funds and a change in the mandate of those institutions.
However, it is important to realise that the arguments in favour of shifting the provision of suitable public goods to the EU level stand regardless of the way they are financed at the central level. The financing of European public goods can happen via the EU or the European Stability Mechanism, as elaborated by Scazzieri and Tordoir (2024). The latter has the advantage for member states that it can be an off-EU budget solution, as described by Scazzieri and Tordoir (2024). The ESM has €500 billion lending capacity of which €422 billion is unused at the moment and growing due to repayments. With €80 billion paid-in capital and €620 billion callable capital, it has the largest capital base of all International Financial Institutions in the world. Being a permanent institution paid in capital – unlike NGEU – is a reason the European Stability Mechanism bonds are issued at favourable rates. If the lending is broader than purely distressed lending, the balance sheet can be leveraged even further and maintain strong market attractiveness. The ESM can provide European financing for certain European public goods when the euro area is threatened by financial stability risks. In the pandemic, ESM introduced the Pandemic Crisis Support aiming to support euro area countries cover medical and health care expenditures. Letta (2024) proposes a similar approach to defence financing: “mirroring the Pandemic Crisis Support framework, this Defence Support Line could provide loans of up to 2% of a member country’s GDP at exceptionally favourable interest rates, specifically earmarked for defence and security expenditures.” Finally, as part of the ESM Treaty reform, once fully ratified, it will become the European fiscal backstop to the Single Resolution Fund. These are examples of European public goods in the scope of the ESM current and revised mandate. For other European public goods, it might require the political will to change the ESM Treaty. A potential link could be that the lack of provision of ESM-financed European public goods would increase the risks for financial stability for the euro area or EU as a whole.
European issuers (EU, ESM/EFSF, and EIB) price between France and Germany at the moment, which would mean cost savings not only for France, but also for Spain and Italy. By contrast, some countries would pay more. However, an interest payment schedule can be designed to distribute the cost savings in such a way that all European countries can borrow more cheaply via the European institutions than through national borrowing. This is made possible by the fact that weighted average financing, for example through the ESM, is cheaper than the weighted euro area financing. Each country could then receive a small reduction on its market interest rate when borrowing from the supranational institutions. If the pricing is adjusted based on the rating, the financing can be attractive for all countries, including Germany and The Netherlands. Figure 1 below shows European Safe Asset ESM pricing below the euro area GDP weighted pricing of the countries. It is lower than 17 out of the 20 euro area member states. The cost advantage could be spread over the 20 euro area countries and result in more than €5 billion of savings over ten years. Additionally, more AAA European Safe Assets could tighten the pricing further due to size and liquidity and increase further the cost advantage for European borrowers.
Figure 1 Euro area ten-year yield levels
To conclude: There is more momentum than ever for European public goods
It might sound counter-intuitive, but there is more momentum for European public goods than ever. We have seen the policy and political debate shift. Over the course of last year, in many of the elections (European, Belgian, Dutch, French, local German, etc.), the priority topics on European public goods have shifted towards defence, security, and migration. The defence and energy threats of Europe come from the Ukraine-Russia war and the Middle East conflict. Security threats go into the area of government systems being hacked (The Netherlands) or Schengen free-movement rules being suspended (Germany and France). The migration debate is now about protecting the external borders of Europe. We see a political and policy shift towards more protectionism, conservatism, and ‘Europeanism’. There is less certainty in the rest of the world, so more focus on European solutions. Draghi’s report has helped reset the agenda of European competitiveness (Draghi 2024) and Letta’s report has put forward a strategy to improve and boost the benefits of the Single market (Letta 2024). The assertive approach of the new US administration (Bertoldi and Buti 2025) makes it even more urgent to supply European public goods in the economic and security domains.
Things are moving. On 3 February 2025, the first Informal EU leaders met under European Council President Costa to set priorities for the next five years on European public goods and especially defence finance. They focused on European efforts to mobilise more private and public investments, using the EU budget, European Investment Bank, and other ideas including additional common options and more innovative ones. We aim to contribute to this debate. To make a success of the ambitious Competitiveness Compass presented by the Commission (European Commission 2025), the EU should invest in European public goods and not rely on national state aid only that would fragment the Single Market. Many topics dealt with in the Compass are cross-border in nature and best taken up centrally in the form of EPGs. Financing them together will make Europe stronger, geopolitically, in markets, and will save money for its citizens.
Source: Cepr.org
