The European Commission's proposal for the next EU budget marks an ambitious effort to boost and restructure funding around strategic priorities such as competitiveness, defense and strategic autonomy, but it faces significant internal resistance over revenue sources, spending cuts and greater centralization, setting the stage for a protracted and complex negotiation process over the next two years. On July 16, the European Commission unveiled a proposal for a 1.98 trillion euro ($2.31 trillion) EU budget for 2028 to 2034, amounting to 1.26% of the bloc's gross national income (GNI) and a 70% increase from the current seven-year budget. Brussels has also proposed overhauling the budget's structure and allocation by consolidating multiple budget lines into three, more centralized pillars. The first pillar allocates 865 billion euros to so-called National and Regional Plans, which merge the bloc's Common Agricultural Policy and Cohesion Policy funds and tie funding to reforms and rule-of-law compliance. The second pillar allocates 410 billion euros to a Competitiveness Fund, which will channel funds to ''secure supply chains, scale up innovation, and lead the global race for clean and smart technology.'' And the third pillar allocates 200 billion euros to a Global Europe Fund for humanitarian aid and payments to EU member candidate countries. Alongside the budget, the European Commission also proposed two other funding schemes, a 150 billion euro loan scheme called ''Catalyst Europe'' to support member states boost investments in energy infrastructure, strategic technologies, defense and other critical sectors, and a 100 billion euro ''Ukraine Reserve'' to support Ukraine's reconstruction. Finally, the commission proposed several ways to raise funds directly, including a new EU tax on large companies doing business in the bloc, as well as re-allocating part of revenue generated from the sale of carbon permits in the European Union Emissions Trading System (ETS) and from the upcoming Carbon Border Adjustment Mechanism (CBAM) — which would otherwise go to EU member states — directly to the EU budget. The proposal will now enter a two-year negotiation process requiring unanimous approval from all member states and the European Parliament before it can take effect.

• The new proposed budget allocates 300 billion euros for the Common Agricultural Policy (CAP), down from the 386.6 billion euros in the current budget. CAP and Cohesion Funds are two of the European Union's largest and most longstanding budgetary instruments, which for decades absorbed the bulk of common EU spending. Designed to promote economic development and reduce regional disparities, CAP provides financial support to farmers and rural communities to ensure food security, stabilize agricultural markets and sustain rural livelihoods. Cohesion Funds — which make up nearly one-third of the European Union's current long-term budget — aim to boost economic convergence by financing infrastructure, job creation and sustainable development, particularly in less-developed member states.
• The proposed 451 billion euro European Competitiveness Fund aims to strengthen the European Union's industrial base by channeling investment into strategic sectors, accelerating innovation and supporting the transition to clean technologies. A central focus of the fund is enhancing Europe's defense capabilities, with 131 billion euros earmarked for defense and space, representing a fivefold increase compared to current allocations. 
• The new revenue-raising measures proposed by the European Commission aim to generate 58.5 billion euros annually to support its revamped spending framework and reduce reliance on direct national contributions. This includes an EU-level tax on companies with annual turnover exceeding 100 million euros, expected to raise 16 billion euros per year. In addition, the commission has proposed annually redirecting 9.6 billion euros from the sale of carbon permits under the bloc's ETS and collecting 1.4 billion euros per year from the CBAM, a carbon tariff on imported goods with high emissions intensity that will take effect next year.

The European Commission's budget proposal seeks to reorient EU spending away from legacy programs like agriculture and regional development toward strategic priorities like rearmament, industrial competitiveness and technological innovation. The goal is to centralize funding, streamline decision-making and enhance the bloc's ability to respond to intensifying geopolitical and economic challenges, including the fallout from Russia's 2022 invasion of Ukraine, growing uncertainty over U.S. commitments to Europe's defense, rising trade tensions with both the United States and China, and concerns about the future of Europe's own socio-economic model. The European Union's economic growth has trailed behind that of the United States and China for decades, and the external conditions that once underpinned EU prosperity — e.g., exports to the Chinese market, cheap Russian energy imports, and the peace dividend enabled by U.S. security guarantees — are now fading away. Brussels is prioritizing boosting productivity and competitiveness to address these challenges and thus preserve the bloc's social model and high living standards, especially as it enters a phase of long-term demographic decline. In particular, the European Commission is seeking to enhance defense self-reliance through the development of an independent and resilient military industrial base, and invest in energy diversification and infrastructure to reduce costs and external dependencies, especially on Russia. In parallel, climate and sustainability objectives, central to the current budget, now face reduced emphasis and funding, reflecting a broader shift in priorities toward competitiveness and industrial resilience, and, to some extent, the growing political backlash against green policies led by conservative and right-wing parties across the bloc.

• The commission's budget proposal is heavily informed by former European Central Bank President and Italian Prime Minister Mario Draghi's September 2024 report on European competitiveness. The report identified key structural weaknesses, including fragmentation in Europe's defense and telecom sectors, chronic underinvestment in research and development, and an overdependence on non-EU suppliers for energy, critical raw materials and, most importantly, critical technologies like AI and semiconductors. It also underscored the inefficiencies caused by EU countries' disjointed national defense regulations, which prevent economies of scale and slow the integration of advanced systems. Additionally, the report warned that persistently high energy prices across the European Union — exacerbated by the costly transition to renewables and weak grid infrastructure — are undermining energy-intensive industries and threatening Europe's industrial core. To overcome these challenges, the report called for a substantial increase in coordinated EU-level investment.
• The new EU budget prioritizes defense and competitiveness over climate and the green transition, which were central to the 2021-2027 budget framework. Total resources for green initiatives have been slightly reduced. Initiatives aimed at boosting biodiversity across the bloc also no longer have a dedicated budget line, and are instead now folded into a broader ''climate and environment'' target set at 35% of total spending (around 700 billion euros). This compares to the current allocation of 30% for climate, plus a separate 7.5% earmarked for biodiversity in 2024, rising to 10% by 2026 and 2027. Moreover, parts of the funding previously dedicated to nature and biodiversity have been absorbed into broader instruments such as the National and Regional Plans and the 410 billion euro Competitiveness Fund, raising concerns over diluted focus and potential greenwashing.

Several elements of the proposed EU budget reform — particularly efforts to increase, centralize, consolidate and attach stricter conditionality to funds — are already facing pushback from several member states, which will complicate Brussels' plans to significantly scale up and streamline common financing for priorities like competitiveness and defense. While its proposed budget is nominally larger than the current one, Brussels will likely only be able to mobilize a modest increase in additional funding, as repayments of COVID-19 recovery funds and likely political concessions from the upcoming two-year negotiation process will limit room for new spending. In fact, ambitions to expand common funding face strong political headwinds, as new EU revenue-raising measures have traditionally been met with skepticism from member states, while fiscal hawks remain firmly opposed to any significant increase in overall spending. Revenue-raising measures — especially a proposed tax on large corporations operating in the European Union — remain politically contentious as well. Member states strongly oppose granting Brussels tax-collecting powers, a prerogative they seek to retain full control over in order to protect their own revenues and prevent the emergence of a parallel fiscal authority at the EU level. Moreover, even if member states gave Brussels additional tools to generate its own revenue, the budget proposal still requires greater national contributions from EU states, many of which are either unwilling (like fiscally conservative Germany and the Netherlands) or unable (like fiscally constrained France, Italy or Spain) to increase their national contributions to the EU budget. As a result, the European Commission will likely have no choice but to largely reconfigure existing instruments rather than meaningfully expand the budget or create new funding streams. Moreover, member states — including both net contributors and major beneficiaries of the budget — will likely strongly push back against the proposals that involve cutting funding for programs like the CAP, centralizing control in Brussels, attaching stricter conditionality to funding, and expanding joint borrowing. Overall, these constraints portend a lengthy and complex negotiating process over the next two years that will likely force the commission to ultimately reduce the size and scope of its ambitious proposal. 

• From 2028 onward, the repayment of the joint debt issued by the European Union to finance its COVID-19 recovery fund will increasingly consume the bloc's budget. These annual repayments, estimated to be between €25 and €30 billion, will limit space for new spending just as demands for EU-level investment are rising. 
• Germany and the Netherlands have already voiced strong opposition to the commission's proposed budget increase, arguing it is incompatible with ongoing national fiscal consolidation efforts. Berlin called a comprehensive expansion ''unacceptable,'' while Dutch Finance Minister Eelco Heinen said the proposed budget was ''too high'' and urged spending cuts. 
• The backlash is even sharper over the proposed EU-level tax, as allowing the commission to levy its own taxes, even indirectly, could erode member states' control over fiscal policy and deepen EU integration without formal treaty change. German Chancellor Friedrich Merz rejected the idea of corporate taxation by the European Union, citing the absence of a legal basis. This position was echoed by the Dutch government, which declared the issue ''not up for discussion.'' Even beyond the usual fiscal hawks, critics — including members of Italian Prime Minister Giorgia Meloni's party — warned that tax increases would risk undermining growth. 
• Farming lobbies fiercely oppose any attempt to reduce overall support or integrate CAP into broader cohesion funding. CAP's share of the EU budget has already been steadily declining, and farmers across the bloc — who face potential budget cuts of up to 30% — have already taken to the streets in protest. Poland and other major cohesion fund recipients are also resisting plans to consolidate regional aid into a centralized ''megafund'' under tighter oversight by the European Commission. Critics warn that tying cohesion funds to national plans risks overcentralizing the EU budget, sidelining regional authorities and undermining its redistributive function. Even within European Commission President Ursula von der Leyen's own European People's Party, lawmakers have expressed concern that the proposed budget sidelines the European Parliament and weakens the cohesion policy's institutional foundations.
• Finally, Hungary and Slovakia oppose the European Commission's push to attach stricter rule-of-law conditionality to cohesion funds, viewing it as a politically motivated effort to centralize control in Brussels and penalize dissenting member states.