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EU’s most indebted countries could spend enough to meet their own climate targets and still see their debt burden fall by the 2030s

The EU’s most indebted countries could spend at least an additional €135bn a year and see their debt burden fall - but new fiscal rules would prohibit this

The European Union’s most indebted countries could spend at least an additional €135bn a year on green investments and still see their debt burden fall by the 2030s, according to research from the New Economics Foundation (NEF) published today. This investment is necessary if member states are to meet the EU’s climate targets and achieve a socially just transition.

The research finds that the EU’s new borrowing rules are holding back member states from making green investments which generate more value than other public investments in the long term. Such investments are likely to stimulate economic growth that will outpace debt levels, which would mean countries’ debt-to-GDP ratios falling, even if they are making green investments while running a deficit. Previous NEF research has found that the countries that cut their budgets the most between 2009 – 2019 saw the largest increases in their debt-to-GDP ratios, including Spain, Greece, and Portugal.

The research finds that the rules proposed by the Commission fail to consider the social and environmental cost of spending cuts. If countries are forced to make cuts to infrastructure and public services, it will lead to slower economic growth. Restricting spending to mitigate climate change now will mean governments have to spend more in the future on adapting to the impacts of climate breakdown.

The research also finds that the proposed rules risk driving a wedge between wealthier and less indebted countries, such as Germany, Netherlands and Poland, which will have a greater capacity to borrow within the fiscal rules, and less wealthy countries such as Italy, Spain and Greece, which will face greater restrictions to making the investments they need.

Previous NEF research has found that new borrowing rules currently proposed by the European Commission will restrict the ability of all but four EU countries to make the investments they need to meet their international climate commitments to limit global heating to 1.5C. The European Court of Auditors have similarly raised alarm that the EU is at risk of failing to meet its 2030 climate change targets, owing to uncertainty over whether sufficient funds are being invested in the transition.

The research recommends that the EU rejects arbitrary debt and deficit limitations on member states in favour of a more flexible approach, considering the needs and circumstances of each individual country. It also argues that green spending should be excluded from the 3% deficit limit the EU sets on member states.

Sebastian Mang, senior policy and advocacy officer at the New Economics Foundation (NEF), said:

Deadly heatwaves, devastating wildfires and catastrophic floods this summer have once again highlighted the severity of the climate crisis for all to see. The EU is failing to see the bigger picture by focusing on arbitrary debt reduction goals that restrict green spending, rather than encouraging the green investment Europe desperately needs to transition our economies, invest in climate-friendly public services and become a powerhouse for green manufacturing. This is short sighted, as not only is green spending necessary to protect the planet we all depend on, but it has the potential to unlock innovation and guarantee the prosperity of European citizens in the future.”


The New Economics Foundation is a charitable think tank who are wholly independent of political parties and committed to being transparent about how it is funded.

The new research can be found at https://​newe​co​nom​ics​.org/​2​0​2​3​/​0​8​/​n​e​w​-​e​u​-​f​i​s​c​a​l​-​r​u​l​e​s​-​j​e​o​p​a​r​d​i​s​e​-​i​n​v​e​s​t​m​e​n​t​-​n​e​e​d​e​d​-​t​o​-​c​o​m​b​a​t​-​c​l​i​m​a​t​e​-​c​hange

Previous NEF research showing the ability of member states to borrow to meet their Paris climate commitments can be found at https://​newe​co​nom​ics​.org/​2​0​2​3​/​0​4​/​b​e​y​o​n​d​-​t​h​e​-​b​o​t​t​o​m​-line

When we have referenced Commission DSA data we are using leaked documents supplied by Politico.

In the 1/​20th rule and DSA adjustment comparison it is worth noting that DSA is both a recommendation and a forecast. Therefore, while the 1/​20th rule only implies the adjustment needed, while above 60% the DSA adjustment will include any adjustment after this has been achieved. Regardless, our modelling showed that countries would make adjustments larger than required by the 1/​20th rule in the period they are above 60%.

In our modelling of stimulus we assume that borrowing is taken out on 10-year bonds at par with coupon payments equivalent to the May 2023 data from the commission on secondary market yields on government bonds with maturities of close to 10 years per country. The high and mid-range multipliers are taken from this IMF paper with estimates on the impact of the European Structural Investment fund environmental spending and in general. The low multiplier is from the 2022 Debt Sustainability Monitor from the EU Commission.

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