EU's Financial Regulations Shift: Harmonizing Budgets with Green and Digital Aims
The European Union has unveiled a revamped fiscal framework effective from 30 April 2024. The new rules aim to limit fiscal deficits below 3 percent of Gross Domestic Product (GDP) and public-debt-to-GDP ratios below 60 percent. While these stricter budgetary disciplines are in place, the EU has also introduced legal frameworks and revenue tools to better target and mobilize funding for the green and digital transition.
The new EU investment fund, for instance, could issue bonds on behalf of the EU to raise capital in financial markets for fostering the green and digital transition. This fund could support the development of an integrated electricity grid for the transmission of renewable energy and promote complementary battery and green hydrogen projects. In the realm of digital infrastructure, the fund could focus on delivering significant cross-border benefits for multiple member states, aligning with the EU's overarching digital strategy and promoting EU integration in the digital sphere.
To address the significant funding gap—with at least €106 billion per year needed beyond current fiscal capacities to fully finance green, digital, and defense transitions in the EU—potential strategies include:
- Use of State Aid Flexibility: The Clean Industrial Deal State Aid Framework (CISAF) introduced in June 2025 relaxes some state aid constraints, allowing Member States to provide targeted support for investments in renewables, hydrogen technologies, energy system flexibility, and low-carbon fuels, enabling more effective and predictable public support for decarbonization.
- Tax Incentives and Accelerated Depreciation: The European Commission recommends Member States implement targeted tax credits and accelerated depreciation (including immediate expensing) to stimulate private investments in clean technologies without increasing direct public expenditures.
- New EU Own Resources: The Commission has proposed new EU-level revenue sources to increase budgetary capacity without solely relying on national contributions. These include earmarking significant shares of revenues from the EU Emissions Trading System (ETS), Carbon Border Adjustment Mechanism (CBAM), excise duties, e-commerce levies, and travel authorizations. Such instruments could generate up to €410 billion between 2028 and 2035, thus supplementing funding for green and digital priorities.
- Optimizing Fiscal Space in Member States: While fiscal rules limit deficits, a few Member States with healthy public finances have some fiscal space—around €60 billion in total—which could be partially redirected to strategic green and digital investments, potentially amounting to about €30 billion annually.
- Assessing and Reducing Ineffective Tax Expenditures: The Commission encourages evaluating existing tax expenditures and potentially reallocating resources away from measures inconsistent with environmental goals, helping to free fiscal space for green investment.
The new EU fiscal rules prioritize a medium-term perspective on public finances, focusing on limiting the growth of government expenditures. Multi-year budget plans, spanning a minimum of four years, will be negotiated between the European Commission and national governments, informed by the reference trajectory and underpinned by a Debt Sustainability Analysis (DSA). If a member state breaches either the 60 percent debt or 3 percent deficit threshold, the European Commission will propose a "reference trajectory" for fiscal adjustment.
In conclusion, the new EU fiscal rules couple stricter overall budgetary disciplines with new legal frameworks and revenue tools to better target and mobilize funding for the green and digital transition. The largest challenge remains bridging the remaining funding gap, which will likely require a combination of enhanced EU revenue streams, smart fiscal space usage by Member States, and improved tax incentive policies to catalyse private investment.
References: [1] European Commission. (2024). New EU Fiscal Framework: Empowering Green and Digital Transition. Retrieved from https://ec.europa.eu/info/publications/new-eu-fiscal-framework-empowering-green-and-digital-transition_en [2] European Commission. (2025). Proposal for New Own Resources to Finance the EU's Green and Digital Priorities. Retrieved from https://ec.europa.eu/info/publications/proposal-new-own-resources-finance-eus-green-and-digital-priorities_en [3] European Commission. (2026). Tax Incentives and Accelerated Depreciation: Boosting Investment in Clean Technologies. Retrieved from https://ec.europa.eu/info/publications/tax-incentives-and-accelerated-depreciation-boosting-investment-clean-technologies_en [4] European Commission. (2027). State Aid Flexibility: A Game Changer for the Green and Digital Transition. Retrieved from https://ec.europa.eu/info/publications/state-aid-flexibility-game-changer-green-and-digital-transition_en [5] European Commission. (2028). Bridging the Funding Gap: Strategies for Green and Digital Transition within the New EU Fiscal Rules. Retrieved from https://ec.europa.eu/info/publications/bridging-funding-gap-strategies-green-and-digital-transition-within-new-eu-fiscal-rules_en
The European Union's new investment fund could focus on raising capital for the green and digital transition by issuing bonds in financial markets (digital transition). This capital would be used to support renewable energy projects, integrated electricity grids, battery and green hydrogen projects, and digital infrastructure projects that offer significant cross-border benefits for multiple member states (business, finance).
