EU budget: how to deliver more with less? The case for financial instruments

The European economies have finally left the economic crisis behind. The ongoing recovery and a transition toward economic expansion have gradually improved investor access to credit, but the structural market failures will remain. They will continue trapping long-term investments at levels below what is socially optimal. Hence, targeted public intervention is still required to support sustainable, welfare-improving, long-term investments in the sectors that are confronted with structural market failures. In addition, challenges such as the remaining low productivity, the persistence of poverty, long-term unemployment and youth unemployment, the increasingly visible impact of climate change, the growing incidence of violent conflicts, and the resulting increase in migration and forced displacement will continue as major forces affecting the European Union (EU) for some time to come. The financial dimensions of these challenges are huge and cannot be tackled by public spending and traditional funding instruments, such as the EU budget appropriations, in isolation. It is essential to leverage public money and make more funds available to the real economy. Whilst grants will remain a significant component of the EU budget, and are necessary to ensure the financing of many projects, a continued use of financial instruments and budgetary guarantees in the 2021–2027 Multiannual Financial Framework (MFF) is justified where possible and appropriate. The financial instruments and budgetary guarantees will enable the EU to do even more with scarce resources in addressing the structural market failures that result in reduced economic growth and job creation. While substantial reforms have been undertaken in EU policies to perform better, it is extremely difficult to reform the structure of the EU budget as long as the decision-making process requires unanimity of the Member States and is mainly driven by a net balance approach. With new priorities to finance and a shortfall in financing due to the United Kingdom’s withdrawal, the negotiation of the 2021–2027 MFF will be particularly sensitive and complex. If the financial instruments are well designed and efficiently governed, they may be one of the tools to match budgetary means and political goals, at a time of scarce public resources but growing challenges.