Common Borrowing & the EU’s Next Budget
But also — Trade, AI, Climate
Hello! Today is July 10th, and here is your EU news summary for the week. Feel free to share this newsletter with friends and colleagues, and follow us on Twitter and LinkedIn.
The Briefing
The issue of joint debt is expected to make a major comeback at the Council table in the coming weeks.
Taking inspiration from the post-Covid recovery plan NextGenerationEU, the European Commission is expected to propose a new financial instrument that would allow the EU to raise money on financial markets, according to an article in the FT published last week.
OPPOSITION FROM THE “FRUGALS” • This instrument would aim to provide loans and grants to Member States in times of crisis. Although each use would require the agreement of all 27 Member States, it would nevertheless mark a formalisation of the principle of a debt union.
The instrument is expected to be presented on July 16 as part of the Commission’s proposal for the Multiannual Financial Framework 2028-2035 (the EU’s long-term budget).
The so-called “Frugal Four” (Netherlands, Austria, Denmark, Sweden), traditionally opposed to increasing the EU budget, are expected to reject the idea of a debt union during times of crisis.
The Netherlands has already expressed its total opposition to any instrument based on joint borrowing.
Sweden, along with Germany, appears open to a fund offering low-interest loans to Member States. However, they seem strongly opposed to a fund distributing grants, which would represent a much stronger act of solidarity by placing the burden of repaying the joint debt on all 27 Member States.
LOW-INTEREST LOANS • On the other hand, “back-to-back” loans — guaranteed by the EU but to be repaid by the Member States requesting them — have become common practice in recent years amid ongoing crises.
These were first introduced at the start of the pandemic through the SURE instrument, which refinanced short-time work schemes. Low-interest loans accounted for €291 billion of the recovery plan (compared to €338 billion in grants).
More recently, at the end of May, the 27 Member States adopted the SAFE instrument, designed to offer €150 billion in low-interest loans to Member States to help boost their military spending.
While the debate on joint borrowing is far from over, another budget-related project from the Commission has already been stirring debate in capitals and the Brussels bubble for several weeks.
At the end of May, Commission President Ursula von der Leyen announced her intention to make disbursements from the future multiannual budget conditional on meeting “milestones” and “targets.”
“Each tranche of [EU] funding will be disbursed when the agreed objectives have been achieved,” she explained. “We all know this is the strongest incentive you can set to get things done.”
The scope of this new system of national plans, modeled after NextGenerationEU, remains to be defined, but it could potentially encompass the Common Agricultural Policy (CAP), cohesion policy, or even the European Social Fund (ESF).
According to the Commission, this centralisation would simplify the implementation of the EU budget.
REGIONAL PUSHBACK • The role of regions — which is crucial in allocating funds, particularly for cohesion policy — could be threatened by this move, even though the Commission President denies it. In particular, allocations could now be determined based on national GDP rather than the specific needs of regions.
This initiative is viewed with suspicion by the EU’s 132 regions. Their representatives met last week with Executive Vice-President for Cohesion and Reforms, Raffaele Fitto, to emphasise the need to maintain a dedicated budget for cohesion policy beyond 2027.
COMPETITIVENESS AS A PRIORITY? • A few days earlier, 14 Member States — including Italy, Romania, and Poland, most of which are net beneficiaries of cohesion policy — joined forces to call for a “distinct and robust” budget for regional development.
The two main groups backing von der Leyen’s majority in the European Parliament, the EPP (conservatives) and the S&D (social democrats), have also opposed the project for national and regional partnerships per Member State.
After the European Commission’s proposal, the Multiannual Financial Framework will be debated among the 27 Member States, who must adopt it unanimously. The European Parliament must approve it by a majority vote, but does not technically have the power to amend it.
The discussions could last many months. In the previous cycle, the 2021–2027 framework was only agreed upon by the Council on December 10, 2020, and was formally adopted by the Parliament on December 16.
The talks are also expected to touch upon the overall level of the budget, with some Member States likely to call for an increase to boost investment. A dedicated fund for competitiveness is expected to be created.
In Case You Missed It
TRADE • Donald Trump has extended the EU trade deal deadline to August 1. If no agreement is reached, steep tariffs will kick in: 50% on steel and aluminum, 25% on cars and auto parts, and 10% on most other European goods.
Germany stands to lose the most. Its auto industry, which makes up about 5% of the country’s GDP, relies heavily on the US market.
In response to the looming tariff threat, major German carmakers have floated a proposal: allow one EU-made vehicle to be exported tariff-free for every car produced in the US and re-exported. The plan would clearly favor manufacturers already operating on American soil, putting companies from other EU member states, with less local presence, at a disadvantage.
Several European capitals have pushed back, calling the scheme unbalanced and a potential incentive for offshoring. While Berlin has not officially endorsed the idea, it shares the underlying goal: reaching a deal swiftly.
Other governments, including France and Spain, are advocating a firmer line. They argue that the EU should be ready to roll out countermeasures if talks break down.
The European Commission has already put a €21 billion retaliation package on hold and is preparing a second round worth €95 billion, targeting U.S. aircraft, alcohol, and food exports.
So far, Brussels has taken a cautious approach. In April, Trump announced a “pause” on new tariffs for countries that refrain from responding to the existing 10% duties.
In turn, the Commission proposed suspending EU tariffs that had been planned in retaliation to the US’ 25% steel and aluminum duties, even though Washington’s measures have remained in place.
Anna Cavazzini, Chair of the European Parliament’s Internal Market Committee, criticized the move, saying that “not directly responding to illegal Trumps tariffs in April was a mistake”, one that has left the Commission with little leverage to negotiate lower rates.
The UK, meanwhile, has already signed a deal: 10% tariffs on 100,000 cars, zero duties on steel and aluminum, and sector-specific concessions. The British compromise, less ambitious on tariffs, was concluded faster, but came at the cost of market access and supply chain flexibility.
The EU, with its 450 million consumers, still hopes its market power will carry weight. But in Brussels, concerns are mounting that a lack of unity, and the blowback from a strategy seen as overly cautious, could end up weakening that leverage.
AI ACT • In an open letter, 46 European business leaders, gathered under the “EU AI Champions” initiative, urged European Commission President Ursula von der Leyen to impose a two-year pause on the implementation of the AI Act.
The AI Act came into force in early August last year, and several provisions are already in effect. Starting August 2, providers of the most advanced AI models will be required to comply with a new set of obligations.
The letter’s release coincides with the drafting of a code of conduct intended to guide companies in applying the rules. Initially expected in May, the document has been delayed and could now be softened following ongoing talks with industry stakeholders.
Henna Virkkunen, the European Commissioner for Digital Affairs, stated on Monday that Brussels is finalizing the code ahead of the August deadline. “We will publish the code of practice before that to support our industry and SMEs to comply with our AI Act” she said.
CLIMATE 2040 • On July 2, the European Commission unveiled a draft climate target for 2040: a 90% net reduction in greenhouse gas emissions compared to 1990 levels. It’s meant as a midterm milestone ahead of the EU’s 2050 net-zero goal, enshrined in the 2019 European Climate Law, which will now need to be amended to reflect the 2040 target.
EU Climate Commissioner Wopke Hoekstra emphasized the proposal’s pragmatic and flexible nature. Two elements illustrate this:
Carbon credits: Starting in 2036, EU countries could count up to 3% of their national emissions reductions by funding green projects abroad, a mechanism allowed under Article 6 of the Paris Agreement.
Emission trading system (ETS): The Commission also wants to allow intersectoral flexibility within the ETS, enabling overperforming sectors to offset shortfalls in others within the same country.
While these measures were partly designed to win over reluctant Member States, they’ve sparked controversy. Environmental groups have criticized both carbon credits and ETS flexibility, warning that such tools may delay real change by allowing governments to buy time instead of transforming their economies and energy models.
French President Emmanuel Macron reportedly sought to delay an agreement on the 2040 target, preferring to focus on a 2035 milestone, expected to be announced at COP30, though the EU aims to unveil both goals simultaneously.
It’s now up to the EU Council and Parliament to adopt their positions ahead of negotiations. The Commission hopes a final endorsement can be secured before COP30, the next UN climate summit, which will take place in Brazil in November.
In the European Parliament, the role of rapporteur (the MEP who leads the Parliament’s work on the file, including the adoption of the institution’s position on the text) was given to far-right group “Patriots for Europe” — a sign of the far-right’s growing influence, especially when it comes to environmental regulation.
What We’ve Been Reading
For the European Policy Center, Anna Crawford argues that the EU hasn’t sufficiently explored synergies between the green steel and defense sectors.
Nicolas Véron, writing for Bruegel, proposes the creation of a single EU financial supervisor to accelerate the development of competitive, integrated capital markets in Europe.
This edition was prepared by Augustin Bourleaud, Mathieu Solal, Lidia Bilali, Hana Rajabally, Lucie Rontchevsky, and Maxence de La Rochère. See you next week!