German Chancellor Friedrich Merz urged the European Union on Thursday to reform its budget to include more investments and reduce subsidies, but rejected any joint borrowing by EU nations to do so. The 27 EU nations are wrangling over the bloc's 2028-2034 budget, with so-called frugal nations like Germany and the Netherlands opposing a big increase in spending proposed by the bloc's executive Commission.
"We cannot meet the challenges of the 21st century with a 20th-century budget," the conservative leader declared in Aachen, Germany, in a speech at the ceremony awarding the Charlemagne Prize to former European Central Bank president Mario Draghi.
In a hard-hitting report on European competitiveness in 2024, Draghi called for a fundamental change of course by the bloc to stay in the race against the United States and China, notably through joint investments. Merz supported Draghi's call, criticising the fact that the EU's budget "has remained, in its content and structure, practically unchanged over the past decades".
He lashed out at the fact that "more than two-thirds of European funds go to redistribution and subsidies". The EU has long relied upon subsidies and redistribution to assuage the impact from disruptions caused by reducing internal trade barriers, as well as to help integrate poorer nations as the bloc has expanded east.
Merz called on the bloc to cut its budget and step up investments meant to boost competitiveness and defence. However the German leader reiterated his opposition to the mechanism advocated by Draghi to fund the investments: joint borrowing by EU nations.
"Excessive indebtedness threatens sovereignty and limits the capacity to act," said Merz, whose comments were likely also directed to a domestic political audience. Last year, after years of inaction, Germany reluctantly relaxed its strict constitutional borrowing limits to bolster investment in defence and infrastructure.
In his speech accepting the Charlemagne prize, awarded to someone who advances European unity, Draghi expressed scepticism of the EU's drive to sign multilateral free-trade deals to lift growth, a policy strongly supported by Germany.
"New trade deals are easier to agree than confronting the unfinished work at home, because that work forces choices Europe has long preferred to avoid: to confront the established rent positions and the vested interests that gain from an incomplete single market and fragmented energy markets," Draghi said. The former Italian premier, who led the ECB from 2011 to 2019, is widely seen as having saved the euro during the bloc's debt crisis.
Draghi's replacement at the head of the ECB, Christine Lagarde, delivered a similar message about the European single market being unfulfilled and the responsibility of national leaders to act upon Draghi's report.
"The United States and China have entered a new age of industrial strategy and geopolitical competition, intensified by tariff wars and rare-earth battles, and all this amid the worst energy crisis on record," Lagarde said in a speech delivered the previous evening.
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