EU budget deadlock drives case for off-balance-sheet funding tools

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Highlights

EU budget negotiations for the 2028 multiannual framework face deadlock as countries resist shifting funds away from traditional priorities like agriculture and regional support.
Growing pressure to meet defence, energy, and technology needs is driving interest in off-balance-sheet tools such as joint borrowing, side budgets, and special-purpose funds.
Spain's European Sovereign Facility proposal and models like the December Ukraine loan—excluding some countries from liability—show coalition-based financing could bypass unanimous budget deals.

Budget talks shift toward alternative funding options

As reported by Financial Times, the European Commission’s proposal for the next multiannual financial framework, covering spending from 2028, tries to redirect resources toward newer priorities while keeping the overall budget broadly unchanged as a share of the economy.

That approach is now running into familiar resistance. Countries concerned about losing existing support are pushing to preserve agriculture and regional transfers, while net contributor states are renewing complaints about excessive spending, leaving less room for defence, energy and technology even though those areas are widely seen as strategic priorities.

The result is a framework that appears less ambitious in both scope and scale. Ireland, despite its mixed position as both a net payer and a long-term beneficiary of EU transfers, faces a difficult task in trying to move member states beyond the usual divide between contributors and recipients.

Coalitions and joint borrowing gain appeal

If the main budget cannot meet new policy demands, pressure is likely to grow for financing mechanisms outside the MFF. The EU already uses that approach in this decade through common borrowing for national unemployment insurance, joint weapons purchases and post-pandemic recovery investment.

One option is to create side budgets or special-purpose funds outside the seven-year framework, either by borrowing jointly and passing funds to member states or by using borrowed money for direct EU spending where the central budget falls short. Another approach is to expand joint borrowing to create a larger EU-backed safe asset, with the aim of lowering financing costs, strengthening capital markets and redirecting more of the bloc’s savings into domestic investment.

A proposal from Spain for a European Sovereign Facility points in that direction by seeking to centralise part of future member-state debt issuance and compensate countries that currently borrow more cheaply than EU bonds. The article says such tools could also support capital market integration and the euro’s international role, while broader joint borrowing could back an EU sovereign wealth fund focused on frontier industries.

These alternatives still face political obstacles, but they may be easier to assemble than a unanimous budget deal because they can focus on narrower policy goals and rely on coalitions of willing states. The Ukraine loan agreed in December, which is backed by the EU budget while exempting Hungary, Slovakia and the Czech Republic from liability, is presented as a model that could be used again.

Our earlier article on the UK joining the EU’s €60 billion defence loan scheme for Ukraine explained how the arrangement would link Britain’s financial contributions to contracts awarded to UK defence firms, while supporting a broader post‑Brexit reset with the bloc. We also noted that the loan was positioned as a more workable alternative to a larger EU defence fund that had stalled, highlighting how targeted financing deals can move forward even when broader agreements are politically difficult.

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