The upcoming budget takes over from NGEU in the European Semester

The initial diagnosis is clear: there is no room for complacency in the face of external threats – such as security risks, climate change and supply tensions – and internal weaknesses – notably fragmentation of the internal market and low productivity growth. In line with the Competitiveness Compass, the three priorities are: closing the innovation gap, decarbonising the economy and reducing strategic dependencies.1 To achieve this, the focus is on effectively integrating the Single Market by reducing barriers, simplifying regulations, and developing the Savings and Investments Union (SIU), with recommendations to better channel European savings into productive investment.

In terms of economic security and strategic autonomy, the central focus is on reducing dependencies in energy, critical raw materials and key technologies. Initiatives such as REPowerEU and AccelerateEU aim to accelerate the diversification of supplies, the deployment of renewables, electrification, and the strengthening of networks and interconnections, turning the energy transition into both a climate and geopolitical policy lever. In parallel, efforts are being made to bolster the industrial base in strategic sectors such as defence, focusing on joint procurement – supported by instruments like SAFE loans – and deeper coordination among Member States, which would allow for more efficient progress on NATO’s new commitments (see first chart).2 

In Central and Eastern Europe, the focus remains on the energy transition in favour of renewable sources, given these regions’ current reliance on coal and gas, along with strengthening energy security. In the Baltic and Eastern European countries, security, defence, and civil preparedness are gaining prominence in the context of the war in Ukraine, while in Southern Europe the recommendations place greater emphasis on social cohesion, the labour market, and climate resilience.

A significant development this year is the increased prominence of housing on the European agenda.3 The Commission links the challenges in this area not only to social cohesion but also to competitiveness, due to their impact on labour mobility and the functioning of the labour market. The recommendations propose action on several fronts: simplifying and expediting permits and planning processes, mobilising public land and improving coordination between different levels of government, boosting the construction and renovation of affordable and energy-efficient housing, reviewing tax incentives that could distort demand, and encouraging the reuse of underutilised housing.

Together, these recommendations reflect a more ambitious investment and reform agenda, the pursuit of which is constrained by the state of European public finances.4 This year’s Spring Package represents the first comprehensive test of both the new fiscal framework adopted in 2024 and the national medium-term fiscal-structural plans submitted in 2025.5 The assessment combines the objective of ensuring the medium-term sustainability of public debt with adapting to an environment marked by rising structural spending needs (defence, energy, digital transformation and population ageing). The response has been to introduce limited and temporary flexibility into the fiscal framework, which, in some cases, allows the new spending pressures to be reconciled with the recommended fiscal path. However, compliance across Member States remains uneven, with risks of deviation concentrated in 2026.6

The main flexibility instrument is the national escape clause for defence expenditure, which was activated last year and allows for an additional spending margin of 1.5% of GDP through to 2028 without compromising medium-term fiscal sustainability. In 2026, its scope will be expanded, within this limit and time frame, to include certain energy-related measures linked to reducing external dependencies: up to 0.3% of annual GDP and a cumulative limit of 0.6% for investment in electrification, networks, storage, energy efficiency, or the clean energy transition.

This flexible design allows the energy and security shocks to be absorbed without formally altering the fiscal anchor. However, it does not eliminate underlying tensions: the margins are temporary, the additional expenditure will be incorporated into fiscal trajectories, and achieving sustainability will depend on these priorities being combined with higher potential growth or cuts to other budgetary items. In this context, the key will be how these new structural commitments are reflected in the spending paths of the medium-term plans. The risk, however, is that the EU may not have resolved the alignment of its strategic priorities with fiscal rules and a greater common budgetary capacity.

With the publication of the Spring Package, the Commission is laying out the diagnosis and guiding the priorities, but it should not be forgotten that the final implementation lies with Member States. In the short term, they must finalise the execution of NGEU funds, apply the country-specific recommendations, and conclude negotiations for the 2028-2034 EU budget, which will determine the EU´s actual capacity to fund its ambitions in competitiveness, defence, energy and cohesion.7 In this context, the focus shifts from the European response to national execution, where factors such as administrative capacity, regulatory delays and territorial fragmentation can be decisive.

The debate, therefore, cannot be confined to the European dimension nor to what is discussed and agreed upon in Brussels. The conclusion of the NGEU programme marks the end of an exceptional instrument and necessitates the establishment of a more permanent framework for investment and reforms. The European Semester sets the direction, but the transition will not be automatic and will require deciding which part of this approach, along with the associated conditionality, is incorporated into the new financial instruments of the next budget (referred to as National and Regional Partnership Plans in the Commission’s initial proposal). Ultimately, it will be the ability – and the political willingness – of Member States to reach and implement ambitious agreements that will determine whether the EU has risen to the challenge.