The European Union (EU) will fall short of funding for the Strategic Agenda set for 2024-2029, which calls for investment in green and digital transitions, according to a report by Finance Watch.
ADVERTISEMENTThe EU leaders agreed on a new Strategic Agenda for 2024 to 2029 last month, prioritising spending and investment in defence, green and digital transitions, the health system, and education. However, these goals, particularly in the green and digital transition, may face a shortfall in funding from private capital, according to Finance Watch. This necessitates a pragmatic discussion about the financial approach to supporting Europe’s long-term strategic plans.
What is the EU’s Strategic Agenda for 2024-2029?
EU leaders agree on a new strategic agenda every five years following the new leadership establishment. On 27 June, the European Council adopted the new agenda for 2024 to 2029, based on three pillars: a free and democratic Europe, a strong and secure Europe, and a prosperous and competitive Europe.
These plans, particularly the third pillar sparked concerns about the EU’s ability to finance its ambitious goals in terms of green and digital transitions. It states that the transitions include: “a genuine energy union and investment in game-changing digital technologies in Europe…significant collective investment efforts, mobilising both public and private funding, including through the European Investment Bank and integrated European capital markets”.
A capital market is a financial market where long-term debt or equity-backed securities are bought and sold, providing a mechanism for raising capital. This market is essential for funding large-scale projects, as it allows businesses and governments to secure the necessary resources for long-term investments. The statement from the European Council necessitates substantial financial contributions from both private and public sectors.
EU heading for an investment crisis, Finance Watch warns
According to a new report by Finance Watch, the EU is facing a substantial funding gap in delivering on the pillars of its Strategic Agenda for 2024-2029, as only one-third of the necessary funds can be sourced from capital markets. Chief economist Thierry Philipponnat warned that addressing climate change alone would require upfront investments amounting to between 5% and 10% of the EU’s GDP per year. “With well-targeted regulation and a lot of political will, we think capital markets can fund up to a third of the EU’s climate needs, in cases where the financial yield is sufficient,” he stated.
In the report, Philipponnat argues that it is unrealistic to expect capital markets to contribute more than one-third of the funding for the EU’s climate change mitigation and adaptation projects. This is because private equity investors typically expect higher returns than these projects can generate. Regarding public funding, EU member states have limited capacity to service additional debt due to regulatory restrictions. He also highlighted that relying heavily on capital markets to fund growing deficits could lead to instability within the EU.
Calls for a financial rethink to achieve funding
The report urges EU leaders to recognise the significant risk of under-investment in climate projects and to take measures to maximise the contribution of capital markets while addressing the remaining investment shortfall.
Previously, former ECB president Mario Draghi emphasised to EU ministers that an “enormous amount of money is needed in a relatively short time”.
Similarly, former Italian Prime Minister Enrico Letta noted in his report that financing the transition is “arguably the most strategic choice the EU can make” and called for “all necessary public and private resources” to be mobilised to achieve this goal.
