The trillion-euro problem: how to meet Europe’s investment needs

On 9th September, Brussels stopped to watch as Mario Draghi presented a report on the future of European competitiveness. The report responded to Europe’s slowing growth and the widening GDP gap with the US. Commission President Ursula Von der Leyen has since asked Commissioners to “draw on” the contents of the competitiveness report, which will continue to frame the debate on Europe’s economic future. A key takeaway was Draghi’s call for an annual investment boost of EUR 800 billion, to tackle the challenges of decarbonisation, digitisation and defence, while maintaining Europe’s global competitiveness. Draghi’s message was clear, either find the money or face the ‘slow agony’ of relative decline. 

Finance Watch believes, when factoring in previous estimates from the European Commission on climate change and adaptation, the 800 billion number increases, putting Europe’s annual investment needs at EUR 1.2 trillion. You would have to look back over 50 years to find similar levels of investment (% GDP). The question arises – where is this money going to come from? 

For years, policymakers in Brussels have looked to private capital as the answer to Europe’s investment needs. The idea has been to reform financial regulation to create a US style liquidity pool that companies can tap in order to scale businesses and support strategic initiatives. But the numbers tell a different story. Simulations by the International Monetary Fund (IMF) and the European Commission reveal a sobering reality – private capital cannot bridge the gap. 

To understand the problem, let’s zoom in on the climate investment gap. Climate change mitigation and adaptation are at the heart of Europe’s investment challenge. With renewable energy still struggling to displace fossil fuels and carbon removal technologies still undeveloped, the EU must act to prevent catastrophic global warming of up to +3°C by the century’s end. Early investments, such as retrofitting homes and retraining people for low-emission jobs, would deliver social benefits worth “double to ten times their cost”.

Yet, a recent Finance Watch report argues that private capital markets are not set up to provide this kind of investment. They are constrained by the basic dynamics of risk and return, with tools like ‘capital asset pricing models’ undervaluing the long-term investments needed for climate mitigation. Debt investors also face difficulties, as many green projects don’t offer the short term returns necessary to justify bond interest rates. Even with the latest sustainable finance regulations, profitability remains a priority over sustainability. The hope that private markets will steer the EU’s green transition is sadly, a fantasy. A fully realised Capital Markets Union could only cover about a third of the necessary funding. Only EU level public investment can provide the stability and long-term vision to fund the initiatives Europe urgently needs.

This logic, however, has met strong political resistance. In response to Draghi’s Report, prominent figures, such as German Finance Minister Christian Lindner and Dutch Finance Minister Eelco Heinen, voiced their opposition to EU debt. Lindner believes that joint borrowing “will not solve structural problems”, while Heinen argued that “more money is not always the solution”. For many, the solution lies in cutting red tape and improving private capital access, rather than increasing public investment. But such measures cannot generate the scale of investment necessary to overhaul Europe’s energy system, bolster its digital infrastructure, and enhance defence capabilities, let alone finance the green transition. The scope of Europe’s structural challenges, laid out in the Draghi report, demand a much larger and more coordinated financial response.

Meanwhile, at the national level, Europe’s investment capacity is constrained by outdated fiscal rules that restrict the flexibility of Member States’ budgets. The EU’s Stability and Growth Pact (SGP) is determined by rigid deficit and debt targets, and does not fully account for the urgent need for large-scale public investment. The current rules fail to recognise the transformative impact that investments in the energy transition, reindustrialisation, and digitalisation could have on Europe’s prosperity. By clinging to these outdated frameworks, the EU is missing an opportunity to use coordinated public spending as a means to address its strategic challenges. Europe must introduce a cohesive investment strategy that balances fiscal discipline with the need for forward-looking public spending.

So what should public financing look like at the EU level? EU bonds remain controversial but necessary. Common debt instruments could spread the financial burden across Member States, enabling Europe to fund an ambitious agenda. Despite resistance from some Member States to embrace this model, the benefits of coordinated investment far outweigh the risks. The experience of the COVID-19 pandemic, showed how collective action can mobilise significant financial resources, as seen through the EU’s Recovery and Resilience Facility. Even in areas like climate and digital transformation, where private investment will play a crucial role, only public investment can ensure the necessary scale and stability. 

Thinking Beyond Bonds

Beyond the debate over bonds, Europe must also consider more innovative solutions. Limited forms of monetary financing, such as targeted investment vehicles or central bank support for green bonds, could be explored. These approaches would need to be carefully calibrated to avoid inflationary pressures or undermining fiscal discipline. Yet, when weighed against the risks of underinvestment, these tools might offer a pragmatic way forward.

In any scenario, Europe must carefully balance its fiscal policies with its strategic goals. The scale of the challenge is immense, but failing to invest in the future would be far costlier. In the race to lead on climate action, digital innovation, and global security, Europe’s ability to mobilise public resources will determine whether it can avoid the ‘slow agony’ Draghi warned of.

Max Kretschmer